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1. [20] If the market rate of interest is 10%, and the inflation rate is 3%,...

1. [20] If the market rate of interest is 10%, and the inflation rate is 3%, what is the real interest rate?
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Answer #1

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate:

Real Interest Rate = Nominal Interest Rate - inflation

Real interest Rate =10% - 3%

7%

Therefore, real interest rate after adjusting for inflation is 7%.

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