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 or to an investor. 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'
While the nominal interest rate is the interest rate officially assigned to the product or investment, the real interest rate is a reflection of the change in purchasing power derived from an investment based on shifts in the rate of inflation. The nominal interest rate is generally the one advertised by the institution backing the loan or investment. By adjusting the nominal interest rate to compensate for the effects of inflation, you are identifying the shift in purchasing power of a given level of capital constant over time.
Expected Rate of Inflation
The anticipated rate of inflation is reported by the U.S. Federal Reserve to Congress on a regular basis and includes estimates for a minimum threeyear period. Most anticipatory interest rates are reported as ranges instead of single point estimates. As the true rate of inflation may not be known until the time period corresponding with the holding time of the investment has passed, the associated real interest rates must be considered predictive, or anticipatory, in nature, when the rates apply to time periods that have yet to pass.
Effect of Inflation Rates on the Purchasing Power of Investment Gains
In cases where inflation is positive, the real interest rate is lower than the advertised nominal interest rate. For example, if funds used to purchase a certificate of deposit (CD) are set to earn 4% in interest per year and the rate of inflation for the same time period is 3% per year, the real interest rate received on the investment is 4%  3% = 1%. The real value of the funds deposited in the CD will only increase by 1% per year, when purchasing power is taken into consideration.
If those funds were instead placed in a savings account with an interest rate of 1%, and the rate of inflation remained at 3%, the real value, or purchasing power, of the funds in savings will have actually decreased, as the real interest rate would be 2%, after accounting for inflation.

Nominal Interest Rate
The nominal interest rate is the interest rate before taking ... 
Nominal Value
Nominal value is the stated value of an issued security, and ... 
Nominal Rate Of Return
The nominal rate of return is the amount of money generated by ... 
Nominal Gross Domestic Product
Nominal gross domestic product measures the value of all finished ... 
Inflation Trade
An inflation trade is an investing scheme or trading method that ... 
Interest Rate
Interest rate is the amount charged, expressed as a percentage ...

Investing
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Insights
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, ... 
Personal Finance
How Interest Rates Can Go Negative
Central banks from Europe to Japan have implemented a negative interest rate policy (NIRP) in order to stimulate economic growth. 
Insights
How Inflation Affects Your Net Worth
When calculating your net worth, don't forget to take inflation into account. 
Financial Advisor
Corporate Bonds and the Impact of Inflation Risk
The impact of inflation risk affecting corporate bond returns can be significant. It may even result in a real loss of purchasing power. 
Insights
The Taylor Rule: An Economic Model for Monetary Policy
Learn about the The Taylor Rule, an interest rate forecasting model that's helped central banks around the world adjust their rates to balance out inflation. 
Investing
Maximize Your Real Rate of Return for Retirement
Learn to understand how to plot your portfolio's real rate of return for retirement planning to safeguard your retirement funds against inflation. 
IPF  Banking
How Inflation Affects Your Cash Savings
Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation. 
Investing
Timeless Ways To Protect Yourself From Inflation
Inflation is a natural part of modern life, but there are some timetested ways to inflationproof your assets.

What is the effective interest method of amortization?
Find out more about the rationale and advantages of the effective interest rate method and how it is used to amortize a discounted ... Read Answer >> 
How does inflation affect the exchange rate between two nations?
Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and can influence ... Read Answer >>