Real Interest Rate Formula
Real rate does not include
inflation rate, and can be calculated from money rate and inflation rate by
using fisher effect formula. it is important to note that real rate is roughly
money rate minus inflation rate, but exact rate can be calculated by fisher
effect.
(1+m) = (1+i)(1+r)
Re arrange formula
r = (1+m) -1
(1+i)
m=money
rate
i=
inflation rate
r=
real rate
Example
Prevailing
Inflation rate = 8%
Money
Rate in market = 12%
Money
Rate=?
Solution
r = (1+m) -1
(1+i)
r = (1+12%) -1
(1+8%)
=3.7% (Real Rate)
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