1. What is Real Interest Rate?

The real interest rate is the nominal interest rate adjusted for inflation. It represents the true cost of borrowing or the true return on investment after accounting for the erosion of purchasing power due to inflation.

2. How Does the Calculator Work?

The calculator uses the Fisher equation:

Where:

• Nominal Rate — The stated interest rate (as percentage)
• Inflation Rate — The expected inflation rate (as percentage)

Explanation: The equation adjusts the nominal rate by the inflation rate to determine the real purchasing power of money.

3. Importance of Real Rate Calculation

Details: Understanding real interest rates is crucial for investment decisions, loan evaluations, and economic analysis as it shows the true return or cost after inflation.

4. Using the Calculator

Tips: Enter both rates as percentages (e.g., 5 for 5%). Both values must be non-negative. The calculator converts them to decimals for the calculation.

5. Frequently Asked Questions (FAQ)

Q1: Why is real interest rate important?
A: It shows the true return on investments or cost of borrowing after accounting for inflation, helping make better financial decisions.

Q2: Can the real interest rate be negative?
A: Yes, when inflation is higher than the nominal interest rate, the real rate becomes negative.

Q3: What's the difference between nominal and real rates?
A: Nominal rate doesn't account for inflation while real rate does. Nominal rate = real rate + expected inflation (approximation).

Q4: How often should I calculate real rates?
A: Regularly, especially when making long-term financial decisions or when inflation is volatile.

Q5: Is this the exact Fisher equation?
A: This is the exact form. The simplified version (real ≈ nominal - inflation) works well for low rates but becomes less accurate with higher rates.