Real Interest Rate
Definition of 'Real Interest Rate'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) |
|
Investopedia explains '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. |
Related Definitions
Articles Of Interest
-
What You Should Know About Inflation
Find out how this figure relates to your investment portfolio. -
Interest Rates And Your Bond Investments
By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it. -
Why Wages Stick When The Economy Shifts
Even economists can't agree on the impact (or even existence) of wage stickiness. So, how does it affect you? -
Inflation-Protected Annuities: Part Of A Solid Financial Plan
If you worry about inflation and longevity risks, this may be the investment for you. -
What is inflation and how should it affect my investing?
Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate of inflation is important as it represents the rate at which the real ... -
What does a cut in interest rates mean for the stock market?
When the next Federal Reserve meeting is expected to bring interest rate cuts or increases, it is wise, as a stock investor, to be aware of the potential effects behind such decisions. Although ... -
Forex Tutorial: The Forex Market
In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market. -
Introduction To Treasury Inflation-Protected Securities (TIPS)
If you want to protect your portfolio from inflation, all you need are a few TIPS. -
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, ... -
Nobel Winners Are Economic Prizes
Before you try to profit from their theories, you should learn about the creators themselves.
Free Annual Reports