Real Interest Rate

Posted in Finance, Accounting and Economics Terms, Total Reads: 667

Definition: Real Interest Rate

Real interest rate is the interest rate which is adjusted for the effects of the inflation.

Suppose a bond pays an interest of 9% on the face value of Rs. 100. At present the rate of inflation is around 4%. So the real interest rate is (9%- 4%) = 5%. As the inflation is 4% we have to subtract it from the interest amount of 9% from the bond. It is because of the following reason.

From the bond we will receive an amount of 109 on maturity. But since the inflation is 4%, the 100 rupees last year is equivalent to 104 rupees this year.

So the effective return from the bond is 109-104 = 105. i.e. 5% which is the real interest rate.



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