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 Rate: Risks, Importance in Economic Theory, Negative Real Interest Rates, Calculating Real Interest Rates Using Change in Value, See Also, External Links
Famous quotes containing the words real, interest and/or rate:
“No real “vital” character in fiction is altogether a conscious construction of the author. On the contrary, it may be a sort of parasitic growth upon the author’s personality, developing by internal necessity as much as by external addition.”
—T.S. (Thomas Stearns)
“Parentage is a very important profession; but no test of fitness for it is ever imposed in the interest of children.”
—George Bernard Shaw (1856–1950)
“Unless a group of workers know their work is under surveillance, that they are being rated as fairly as human beings, with the fallibility that goes with human judgment, can rate them, and that at least an attempt is made to measure their worth to an organization in relative terms, they are likely to sink back on length of service as the sole reason for retention and promotion.”
—Mary Barnett Gilson (1877–?)