# real interest rate

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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.

## Real Interest Rate

An interest rate after accounting for inflation. A nominal interest rate shows by how much an investment or account has grown in raw dollar amounts and may not be an accurate accounting of how well or poorly an investment is performing. The real interest rate adjusts for how much buying power has been affected and, therefore, provides a more accurate view. For example, if one has bond with a 5% coupon, and the inflation rate is 3%, the real interest rate is only 2%. The real interest rate does not take compounding into account.

## 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.

## Real interest rate.

Your real interest rate is the interest rate you earn on an investment minus the rate of inflation.

For example, if you're earning 6.25% on a bond, and the inflation rate is 2%, your real rate is 4.25%. That's enough higher than inflation to maintain your buying power and have some in reserve, which you could use to build your investment base.

But if the inflation rate were 5%, your real rate would be only 1.25%.

## real interest rate

the INTEREST RATE paid on a LOAN, adjusted for the effects of INFLATION. Thus, for example, if a borrower were to pay a 10% NOMINAL INTEREST RATE on a loan during a year when the inflation rate was 6%, then the ‘real’ interest rate would be only 4%. Inflation reduces the real burden of interest payments to borrowers while reducing the real return to lenders.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
It pointed out that the real interest rate of bank deposit reflects the real returns for the persons who lend and deposit money at banks after removing the effects of the inflation to reach 5.59 percent in August 2019 against 13.2 percent in August 2017.
'Primary reason for this increase is to keep the real interest rate positive in light of rising inflation during 1QFY20 on the back of increase in prices of electricity and gas,' he said.
It has also taken into account the rationalisation of tariffs and duties and the narrowing real interest rate as it declined to 1.6 per cent in comparison with the four-year average of 2.85 per cent earlier.
It takes a heroic disposition to assume that this magic number exists or that, even if it does, our collective endeavors will result in an actual real interest rate close to it.