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For example, if the inflation rate is 5%, on a one-year loan of $1,000 with an 8% nominal interest rate the real interest rate would be 8% minus 5% or 3%. The real interest rate will usually be ...
In this analysis, the nominal rate is the stated rate, and the real interest rate is the interest after the expected losses due to inflation. Since the future inflation rate can only be estimated, the ex ante and ex post (before and after the fact) real interest rates may be different; the premium paid to actual inflation (higher or lower).
The Fisher equation can be used in the analysis of bonds.The real return on a bond is roughly equivalent to the nominal interest rate minus the expected inflation rate. But if actual inflation exceeds expected inflation during the life of the bond, the bondholder's real return will suffer.
In the case where the growing quantity is a financial asset, is a nominal interest rate and is the corresponding real interest rate; the first-order approximation = is known as the Fisher equation. [1]
For instance, if a loan offers a 4% nominal interest rate and inflation is 2%, the real interest rate is approximately 2%. The world of finance has a somewhat different definition.
The nominal interest rate may be cited in a financial institution advertisement for a loan or deposit. But nominal interest rates provide only rough estimates of how much it costs to borrow money ...