Real Interest Rate

The real interest rate is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate. If, for example, an investor were able to lock in a 5% interest rate for the coming year and anticipated a 2% rise in prices, he would expect to earn a real interest rate of 3%. This is not a single number, as different investors have different expectations of future inflation. Since the inflation rate over the course of a loan is not known initially, volatility in inflation represents a risk to both the lender and the borrower.

Read more about Real Interest RateRisks, Importance in Economic Theory, Negative Real Interest Rates, Calculating Real Interest Rates Using Change in Value, See Also, External Links

Other articles related to "interest rate, rate, real, real interest rate, interest, interest rates":

Monetary Conditions Index
... These variables always include a short-run interest rate and an exchange rate ... of aggregate demand in an open economy, which include variables such as the real exchange rate as well as the real interest rate ... Since the MCI is a function of the real exchange rate, the MCI is influenced by events such as terms of trade shocks, and changes in business and consumer confidence ...
Interest - Formulae
... regular monthly payments is augmented by the monthly interest charge and decreased by the payment so , where i = loan rate/100 = annual rate in decimal. 10% = 0.10 The loan rate is the rate used to compute payments and balances.) r = period rate = i/12 for monthly payments (customary usage for convenience) B0 = initial balance (loan principal ... in spreadsheet programs can be used to calculate the monthly payment of a loan An interest-only payment on the current balance would be ...
Monetary Policy Reaction Function
... Function (MPRF) is the upward-sloping relationship between the inflation rate and the unemployment rate ... When the inflation rate rises, a central bank wishing to fight inflation will raise interest rates to reduce output and thus increase the unemployment rate ... unemployment rises when the central bank raises the real interest rate r because it thinks that inflation is too high and needs to be reduced ...
Real Interest Rate - External Links
... "Equilibrium Real Interest Rate," by Roger Ferguson, 2004 ... On the distinction between real return and nominal bonds, by Peter Spiro, 2004 ...
Certificate Of Deposit - Criticism
... CD interest rates closely track inflation ... For example, in one situation interest rates may be 15% and inflation may be 15%, and in another situation interest rates may be 2% and inflation may be 2% ... Of course, these factors cancel out, so the real interest rate is the same in both cases ...

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