Real and Nominal Rates

When it comes to the cost of funds, interest rates can be divided into two types: the real and nominal interest rate. When you go to a bank to borrow money, the rate that you will pay on your loan is a nominal interest rate, which already includes the inflation rate. The same is true when you deposit the money, the interest you receive is a nominal rate.

Source: Investopedia

To calculate the real interest rate, you should simply subtract the inflation from the nominal interest rate. The real interest rate shows you how much do you effectively pay for the money borrowing, excluding the influence of inflation or how much money you receive on your investment in the real terms, minus the inflation. 

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