Real rate: Difference between revisions
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A real terms rate - often abbreviated to 'real rate- is one which has been restated to exclude the effects of inflation. | A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation. | ||
The relationship between the Real rate, the Nominal rate and the Inflation rate is: | The relationship between the Real rate, the Nominal rate and the Inflation rate is: | ||
Revision as of 14:55, 14 January 2016
A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation.
The relationship between the Real rate, the Nominal rate and the Inflation rate is:
Real rate = ( ( 1 + Nominal rate ) / ( 1 + Inflation rate ) ) - 1
Example
Nominal rate of return = 6% (0.06).
Inflation rate = 3% (0.03).
The Real rate of return is:
= ( 1.06 / 1.03 ) - 1
= 0.0291
= 2.91%.
