Nominal and real interest rates

Nominal rate % is % in monetary terms.

Real rate % is the nominal rate adjusted for prices (the increase in real wealth expressed as an increase in the purchasing power of the investor or lender).

Nominal rate %=real rate %+inflation rate (i=r+p)

More precise ur-e: i=r+p+rp

Fisher effect:

Nominal rate%=real rate%+expected inflation rate (pe)

(when the inflation rate is unknown).

The nominal % rate includes a surcharge or premium for expected inflation; due to unforeseen inflation, the premium may be insufficient; then there is an effect of income redistribution between lenders and borrowers.

Expected real interest rate - the real interest rate that the borrower and lender expect when granting a loan: r=i-ne

Actual real rate %=r=i-p

If inflation exceeds the increase in the nominal rate, the real rate will be negative.

If rates change in line with inflation, the lender faces potential capital gains losses if:

1.Inflation reduces the real cost of borrowing.

2. the market nominal rate rises => the market value of securities falls and vice versa.

Author: Shevchuk D.A.

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