Real interest is equal to the interest received, or paid, discounted by the value of inflation. Thanks to the real interest rate we can know the real profitability of an investment.
The concept of real interest can be understood very well with an example. If we have an investment with an interest rate of 6%, and inflation is 2.5%, the real interest of the investment is equal to:
Ir= I - CPI
Ir=6%-2.5%=3.5%
Therefore, the real interest on the investment is 3.5%. The relationship between inflation and real interest is inversely proportional, i.e., as inflation increases, real interest decreases.
Real interest is equal to nominal interest minus inflation.
Related terms
Deposit | Mortgage | Mixed interest rate mortgage | Variable interest rate mortgage | Foreign currency mortgage | Reverse Mortgage | Subprime Mortgage | Inflation | Interest | CPI | Loan | Interest rate | Fixed interest rate | Nominal interest rate