What is a 'Real Interest Rate'
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.
Real Interest Rate = Nominal Interest Rate  Inflation (Expected or Actual)
BREAKING DOWN 'Real Interest Rate'
The real interest rate is the growth rate of purchasing power derived from an investment. By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time.
For example, if you are earning 4% interest per year on the savings in your bank account, and inflation is currently 3% per year, then the real interest rate you are receiving is 1% (4%  3% = 1%). The real value of your savings will only increase by 1% per year, when purchasing power is taken into consideration.

Fisher Effect
An economic theory proposed by economist Irving Fisher that describes ... 
Nominal
An unadjusted rate, value or change in value. This type of measure ... 
Inflationary Risk
The uncertainty over the future real value (after inflation) ... 
InflationProtected Security  ...
A type of fixedincome investment that guarantees a real rate ... 
InflationProtected Annuity  IPA
An annuity investment that guarantees a real rate of return at ... 
Nominal GDP
A gross domestic product (GDP) figure that has not been adjusted ...

Term
What's a Real Rate of Return?
A real rate of return is an annual percentage investment return thatâ€™s adjusted for inflation, taxes or other factors. 
Economics
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Economics
Interest Rates: Nominal and Real
An interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. Interest rates are the primary yardstick for measuring how much return lenders will get. However, ... 
Investing Basics
How Inflation Policy Affects You
The Fed estimates a longterm goal of 2% inflation for the near future. Learn how that'll impact you. 
Economics
The International Fisher Effect: An Introduction
The Fisher models have the ability to illustrate the expected relationship between interest rates, inflation and exchange rates. 
Economics
The Taylor Rule: Calculating Monetary Policy
The Taylor Rule suggests how the central bank should change interest rates to account for inflation and other economic conditions. 
Economics
The Taylor Rule: An Economic Model For Monetary Policy
This interest rate forecasting model has helped central banks around the world adjust their rates to balance out inflation. 
Economics
Forces Behind Interest Rates
Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing. 
Investing Basics
What is a Nominal Value?
The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life. 
Economics
Forces Behind Interest Rates
Get a deeper understanding of the importance of interest rates and what makes them change.

How were nominal interest rates in the economy set before the Federal Reserve?
Learn more about how nominal interest rates are determined, how the Federal Reserve targets them, and how they acted prior ... Read Answer >> 
How does inflation affect fixedincome investments?
Learn about the ways inflation can harm fixedincome investments. Find out how to monitor the impact of inflation using common ... Read Answer >> 
What does the Fisher Effect say about nominal interest rates?
Read about what economists call the Fisher effect, which states that real interest rates are equal to nominal rates minus ... Read Answer >> 
If markets give information on value through price, how can nominal values be out ...
Learn more about nominal values, real values and how these two measurements differ. Explore the impact of inflation and deflation ... Read Answer >> 
What does it signify if there is a large discrepancy between a nation's real and ...
Discover the differences between real GDP and nominal GDP and what it means when there is a large discrepancy between the ... Read Answer >> 
The real rate of return is the amount of interest earned over and above the?
The real rate of return is the amount of interest earned over and above the: a. discount rate. b. tax rate. c. inflation ... Read Answer >>