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.
References in periodicals archive ?
If real interest rate differentials are stationary, then they should have mean-reverting qualities, for the whole sample or at least over long regimes.
Successful empirical evidence of the theory implies that the scope for international portfolio diversification is minimal and that the role of monetary policy as a stabilising tool is restricted to the degree that it influences the foreign real interest rate.
lt;span style="mso-spacerun: yes;">&nbsp; </span>The real interest rate, therefore, is negative.
One major shortcoming of this paper is that the causality between the real interest rate and inflation rate was not considered.
In this respect, if the hypothesis holds, then the real interest rate should be stationary.
If the Fed sets rates so that the current real interest rate is above the natural rate, policy is contractionary, and if below, expansionary.
The real interest rate plays a central role in many important financial and macroeconomic models, including the consumption-based asset pricing model, neoclassical growth model, and models of the monetary transmission mechanism.
1) The two phenomena appear to be connected: elementary finance theory states that if the long-term real interest rate is low, the rate of discount used to determine present values will also be low, and hence present values should be high.
The forward nominal interest rate can be seen as the combination of a forward real interest rate and expected inflation.
The concept "neutral real interest rate" is generally associated with the real interest rate level, which implies that monetary policy is neither expansionary nor contractionary.
The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium.
Reduced investment demand and increased propensity to save operate in the direction of a lower equilibrium real interest rate.