What is the real interest rate?
The real interest rate expresses a nominal interest return after accounting for inflation in purchasing power.
Definition, calculation and mechanism
A rough estimate subtracts inflation from the nominal rate; a more exact formula is (1+nominal rate)/(1+inflation)-1. Ex-post real interest uses observed inflation, while ex-ante real interest uses expected inflation.
Interpretation, examples and limits
Taxes, fees and maturity affect net returns. A high nominal rate does not guarantee a high real return. Real borrowing cost also changes if inflation differs from expectations.
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