real interest rate

Real Interest Rate

The amount by which the nominal interest rate is higher than the inflation rate.

Notes:

The real rate of interest is approximated by taking the nominal interest rate and subtracting inflation. The real interest rate is the growth rate of purchasing power derived from an investment.

See also: Inflation, Interest Rate, Nominal Interest Rate, Real Rate of Return, Return

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Real interest rate

The rate of interest excluding the effect of expected inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for expected inflation.

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real interest rate

The nominal current interest rate minus the rate of inflation. For example, an investor holding a 10% certificate of deposit during a period of 6% annual inflation would be earning a real interest rate of 4%. The real interest rate is a more valid measure of the desirability of an investment than the nominal rate is.