1. What is Real Interest Rate?

The real interest rate measures the actual purchasing power of interest payments by adjusting the nominal rate for inflation. It represents the true cost of borrowing or the real return on investments.

2. How Does the Calculator Work?

The calculator uses the Fisher equation:

Where:

• Nominal Rate — The stated interest rate on a bond or loan
• Inflation Rate — The expected or actual inflation rate

Explanation: The equation accounts for the erosion of purchasing power due to inflation, showing the true return after inflation adjustment.

3. Importance of Real Interest Rate

Details: Real interest rates are crucial for investment decisions, economic analysis, and monetary policy. They help investors understand their true returns and borrowers understand their real costs.

4. Using the Calculator

Tips: Enter the nominal interest rate and inflation rate as percentages (e.g., 5 for 5%). Both values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: Why is real interest rate important for bonds?
A: It shows the actual return after accounting for inflation, which erodes the purchasing power of fixed bond payments.

Q2: What's the difference between nominal and real rates?
A: Nominal rate is the stated rate, while real rate adjusts for inflation to show the true economic value.

Q3: Can real interest rates be negative?
A: Yes, when inflation exceeds the nominal rate, the real rate becomes negative.

Q4: How often should I calculate real rates?
A: Regularly, as inflation changes over time and affects your real returns.

Q5: Does this apply to all types of bonds?
A: Yes, but inflation-protected securities (like TIPS) already adjust for inflation in their payments.