Legal Definitions - real rate

Definition: The real rate is the interest rate adjusted for inflation. It represents the actual return on an investment after accounting for the impact of inflation.

For example, if the nominal interest rate on a savings account is 5% and the inflation rate is 2%, the real rate of return is 3%. This means that the investor is earning a 3% return on their investment after accounting for the impact of inflation.

Another example would be if a bond has a nominal interest rate of 7% and the inflation rate is 3%, the real rate of return would be 4%. This means that the investor is earning a 4% return on their investment after accounting for the impact of inflation.

The real rate is important because it allows investors to compare the true returns of different investments. A high nominal interest rate may seem attractive, but if the inflation rate is also high, the real rate of return may be low or even negative.