Real rate

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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:


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