How do you Calculate Nominal and Real Interest Rates?
You would need to know the nominal interest rate and the inflation rate to compute the real interest rate. The nominal interest rate is subtracted from the inflation rate to determine the real interest rate.
The real interest rate, for instance, would be 2% if you had a loan with a nominal interest rate of 5% and a 3% inflation rate. This can be calculated as follows:
The real interest rate is calculated as the interest rate minus inflation.
Real Interest Rate = 5%-3%
Therefore, the real interest rate is 2%.
The real interest rate and inflation rate must be known to determine the nominal interest rate. The real interest rate is multiplied by the inflation rate to arrive at the nominal interest rate.
Nominal vs Real Interest Rates
The portion of a loan that is charged to the borrower is called an interest rate, and it is often stated as an annual percentage. Lenders utilize interest rates to cover the risk they assume when making loans, and they can also be used to help keep inflation under control.