Monday, 21 December 2015

Real Interest Rate Formula

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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