Q.

What is the formula for real rate of interest?

Asked by mani vijay,
10 Dec '12 05:27 pm

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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 five percent interest rate for the coming year and anticipated a two percent rise in prices, he would expect to earn a real interest rate of three percent. 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.

Answered by Ataur Rahman, 10 Dec '12 05:28 pm
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