Difference between revisions of "Real rate"

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A rate which has been restated to exclude the effects of inflation.
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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.
  
The relationship between the Real rate, the Nominal rate and the Inflation rate is:
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Items, such as rates, which have ''not'' been adjusted for inflation are often known as 'money terms' rates, 'nominal terms' rates, or 'nominal' rates.
  
Real rate = ( (1 + Nominal rate)/(1 + Inflation rate) ) - 1
 
  
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The relationship between the Real terms rate, the Nominal rate and the Inflation rate is:
  
For example
 
  
if the Nominal rate of return = 6% ('''0.06''')  
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Real rate = ( (1 + Nominal rate) / (1 + Inflation rate) ) - 1
  
and the Inflation rate = 3% ('''0.03'''),
 
  
then the Real rate of return = 1.06/1.03 - 1  
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<b>Example</b>
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Nominal rate of return = 6% (0.06).
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Inflation rate = 3% (0.03).
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The Real rate of return is:
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= (1.06 / 1.03) - 1  
  
 
= 0.0291  
 
= 0.0291  
  
= '''2.91%'''.
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= 2.91%.
  
  
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* [[Nominal rate]]
 
* [[Nominal rate]]
 
* [[Real]]
 
* [[Real]]
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[[Category:The_business_context]]
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[[Category:Corporate_finance]]

Latest revision as of 16:45, 24 March 2020

A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation.

Items, such as rates, which have not been adjusted for inflation are often known as 'money terms' rates, 'nominal terms' rates, or 'nominal' rates.


The relationship between the Real terms 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%.


See also