How to Calculate the Expected Real Interest Rate

An interest rate tells you how much money you will pay on money that you borrow or that you will earn on money that you loan. The interest rate that most people are familiar with is the nominal interest rate -- that is the state rate of interest on a loan. This doesn't give a full picture however; to properly estimate the interest earned on a loan, you need to calculate the expected real interest rate, which takes inflation into account.

Instructions

1. Write down the nominal interest rate. This is the stated rate of interest before inflation is taken into account. For example, if you take out a loan with an interest rate of 12 percent, the nominal interest rate is 12 percent.

2. Determine the rate of inflation. The rate of inflation is provided by the Bureau of Labor Statistics consumer price index. For example, as of July 2011, the rate of inflation in the United States is 3.6 percent.

3. Subtract the rate of inflation from the nominal interest rate to get the expected real interest rate. For example, with a nominal interest rate of 12 percent and an inflation rate of 3.6 percent, the expected real interest rate would be 8.4 percent.

References

• "Management Accounting"; Pauline Weetman; 2010
• Bureau of Labor Statistics; Consumer Price Index - All Urban Consumers; September 14, 2011