Real interest rate - Financial definition
Financial acronyms
The entire acronym collection of this site is now also available offline with this new app for iPhone and iPad.
Concise definition of the term real interest rate
The real interest rate is the nominal interest rate from which the effect of inflation has been discounted.
Comprehensive definition of the term real interest rate
It is calculated as follows:
\[ i_{r} = \frac{1+i_{nom}}{1+r^{est}_{inf}}-1 \]
Point on the formula to see its legend
Calculation example:
If the nominal interest rate for a 1-year investment (inom) is 5.00%, and the expected inflation rate (restinf) for that year is 1.50%, the real interest rate would be :
If the nominal interest rate for a 1-year investment (inom) is 5.00%, and the expected inflation rate (restinf) for that year is 1.50%, the real interest rate would be :
( (1 + 0.05) / (1 + 0.015) ) - 1 = 3.4483%.