Real Rate Calculation

More about this Real Rate calculator so you can better understand the results provided by this calculator.

The real rate it is typically the rate required by investors, that takes into account the nominal rate of the investment \(R\), but it also considers the effect of inflation.

How do you calculate the real rate?

The following formula is used to compute the real rate of return:

\[ r = \displaystyle \frac{1+R}{1+h} -1 \]

Observe that the expression above gives a link between growth rate and inflation, or more specifically, it shows how the inflation affects the nominal growth rate.

The above formula can be seen also as an inflation rate formula if we solved for the inflation rate \(h\).

Example the calculation of the real rate

Question: If the nominal rate is 4%, and the inflation is 3.1%, what is the real rate?

Solution:

This is the information we have been provided with:

Nominal Rate \(R\) =	\(0.04\)
Inflation Rate \(h\) =	\(0.031\)

Therefore, the real rate \(r\) is computed using the following formula:

\[ \begin{array}{ccl} r & = & \displaystyle \frac{1+R}{1+h} -1 \\\\ \\\\ & = & \displaystyle \frac{1+0.04}{1+0.031} -1 \\\\ \\\\ & = & 0.0087 \end{array} \]

Therefore, given a nominal rate of \(R = 0.04 \) and an inflation rate of \(h = 0.031\), we get that the real rate is \(r = 0.0087 = 0.87\%\).

Calculating different rates

Conversely, if you know the real rate and the inflation, you can instead compute the nominal rate from the real rate . An associated concept is the idea of rate of return on equity, for which can use this calculator .

In terms of interest rate, you may also be interested in the idea of effective annual rate (or EAR).

Another calculator you may want to be interested in using is the Mortgage Payment Calculator .