Real Interest Rate
What is a Real Interest Rate?
A real interest rate is an inflation-adjusted interest rate.
How to Calculate a Real Interest Rate -- Formula & Example
Let's say John Doe has a bond from Company XYZ that pays a 4% coupon. If the inflation rate is 3% per , then the value of that coupon is 4% - 3% = 1%.
In many cases, the real interest rates on savings accounts are negative. For instance, if a savings account pays 1.5% per year but inflation is 3%, the saver is effectively losing every year he has the money in the account. However, putting money in a savings account is better than putting it in a coffee can in the backyard, where it lose the full 3% value every year due to inflation.