Ex Post Real Interest Rate

Formula to Calculate Existent Interest Rate

The existent Interest Rate formula calculates the interest charge per unit afterwards excluding the touch on of inflation. It provides a means to measure inflation-adjusted return on investments in fiscal security or a loan or deposits.

Formula to Summate Existent Interest Rate
- Examples
  - Example #one
  - Instance #2

The formula is given below:

Real Involvement Rate = Nominal Charge per unit of Interest – Inflation (Actual or Expected)

Yous are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be Hyperlinked
For eg:
Source: Real Interest Rate Formula (wallstreetmojo.com)

Thenominal interest rate Nominal Involvement charge per unit refers to the interest rate without the adjustment of aggrandizement. It is a short term interest rate which is used by the central banks to upshot loans. read more Nominal Interest rate refers to the interest rate without the adjustment of inflation. It is a short term interest charge per unit which is used past the cardinal banks to consequence loans. read more than Nominal Interest rate refers to the involvement rate without the adjustment of inflation. It is a curt term interest rate which is used by the central banks to outcome loans. read more more often than not quote the nominal interest rate. Hence, the kickoff rate used in the calculation is the nominal interest charge per unit.
The second one is the inflation charge per unit, which can be the actual rate of interest or an expected charge per unit of interest.
The deviation between the ii is that a nominal rate of interest and an inflation rate will be a Real interest rates are interest rates calculated after taking aggrandizement into account. It is a means of obtaining inflation-adjusted returns on various deposits, loans, and advances, and thus reflect the existent cost of funds to the borrower. read more existent charge per unit of involvement Existent interest rates are involvement rates calculated later taking inflation into account. It is a means of obtaining inflation-adjusted returns on diverse deposits, loans, and advances, and thus reflect the real cost of funds to the borrower. read more .

Examples

Y'all can download this Real Interest Rate Formula Excel Template hither – Real Involvement Rate Formula Excel Template

Example #1

The nominal rate of interest that has been prevailing for a long fourth dimension has been around 9%, and the rate of aggrandizement has come out as 3%. You are required to calculate the real charge per unit of interest.

Solution:

Employ beneath given data for calculation of real interest rate.

Nominal rate of Interest: 9%
Inflation Rate: 3%

Adding of real involvement rate can be washed as follows:

We are given both figures to calculate the real rate of interest.

Real Interest Charge per unit = 9% – 3%

Existent Interest Rate will be –

Existent Involvement Rate = 6%

Hence, the real charge per unit of interest is half-dozen%.

Example #2

The Globe Banking concern has been tasked with completing statistics of some of the countries. They are now left with two countries for which the borderline to complete the statistics is by next week. William has recently joined the squad, which calculates interest rates. William is an economist and has done the main'southward in it. He was given a task to calculate the real rate of interest for the remaining two countries, X and Y. Below are the details nerveless past the ex-employee for these countries.

Particulars	Country X	Land Y
Deposit Charge per unit of Involvement	11%	10.l%
Value of Basket of Appurtenances in year 2019	123,331,456.43	141,678,331.23
Value of Handbasket of Goods in year 2018	120,899,345.98	140,993,221.77

Based on the above available information, you are required to calculate the real charge per unit of interest. If someone wants to invest their funds, where should one invest whether in Country 10 or Land Y?

Solution:

Here, we accept to have a nominal charge per unit of interest which is the deposit rate of interest, merely we are non given the real charge per unit of interest which nosotros shall calculate for both countries.

Aggrandizement Rate for Land X will be –

Inflation Rate = 123,331,456.43 / 120,899,345.98 – 1 = 2.01%.

Calculation of Real Interest Rate for Country X can exist done equally follows:

Real Interest Charge per unit = 11% – 2.01%

Real Interest Charge per unit for Country X will be –

Existent Involvement Rate = 8.99%

Inflation Charge per unit for Country Y will exist –

Inflation Charge per unit = 141,678,331.23 / 140,993,221.77 – 1 = 0.49%

Adding of Real Involvement Rate for State Y tin exist done every bit follows:

Existent Involvement Rate = x.fifty% – 0.49%

Existent Interest Rate for Country Y will exist –

Real Interest Rate = ten.01%

Hence, in real terms, it is better to invest in country Y as the country provides a higher rate of interest.

Example #3

XYZ wants to invest in a fixed deposit, and he wants ABC bank. The bank pays a seven% charge per unit of interest irrespective of the duration and amount. The fixed deposit amount is $100,000. He happily invests the amount for a flow of iii years. Subsequently, on a news channel, he learns that the country is facing a high level of inflation, and currently its 8% and farther information technology was expected that after 3 years it will be eight.l%.

Based on the above scenario, you lot are required to ostend whether XYZ will earn or lose coin?

Solution:

Use below given data for calculation of real interest rate.

Nominal Rate of Interest: vii.00%
Aggrandizement Charge per unit: 8.50%

First, we shall calculate the real charge per unit of involvement. Since XYZ is investing for three years, and hence while calculating a real charge per unit of interest, we shall apply the expected inflation rate of interest which is 8.fifty% and non 8.00%.

Adding of real interest rate tin can be done equally follows:

Real Interest Rate = 7% – 8.50%

Real Involvement Charge per unit will be –

Existent Interest Rate = -1.fifty%

Hence, the real rate of interest is -1.50%, which conspicuously indicates XYZ will lose money in existent terms since inflation is greater than the rate of interest offered by the depository financial institution.

Relevance and Uses

The real rate of involvement shall arrange the observed interest rate of the market so as to remove the effects of ongoing or expected inflation Inflation expectations refer to the stance on the hereafter inflation rate from dissimilar sections of the gild, such as investors, bankers, primal banks, workers, and business organisation owners. As a result, they take this rate into account when making decisions about diverse economic activities they desire to engage in in the futurity. read more .
The real rate of involvement does reflect the purchasing power value of the interest which is paid on a loan or an investment and which shall correspond the rate of interest that will exist preferred time of the lender and the borrower.
Every bit the rate of aggrandizement does not remain abiding, the prospective real charge per unit of interest will rely on the estimates of future inflation that will be expected over the time to maturity of an investment or a loan.
The determination is that an investor earns a real rate and not a nominal rate as the other function of the nominal rate is eaten by aggrandizement.

Recommended Manufactures

This has been a guide to the Real Interest Rate Formula. Here nosotros discuss the calculation of existent interest rate with applied examples and a downloadable excel template. You tin can learn more about financing from the post-obit articles –