Real_And_Nominal_Interest_Rate

Real And Nominal Interest Rate Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay $100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays an interest rate of 6%. Sponsored Links Gdp Growth Access key economic development indicators per country and topics www.worldbank.org/data/ ISA Political and Economic Forecasts. Global Research and Consulting. www.isa-world.com This 6% is the nominal interest rate, as we have not accounted for inflation. Whenever people speak of the interest rate they're talking about the nominal interest rate, unless they state otherwise. Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today and it will cost $100, or we can buy that basket next year and it will cost $103. If we buy the bond with a 6% nominal interest rate for $100, sell it after a year and get $106, buy a basket of goods for $103, we will have $3 left over. So after factoring in inflation, our $100 bond will earn us $3 in income; a real interest rate of 3%. The relationship between the nominal interest rate, inflation, and the real interest rate is described by real, nominal, year, rate, gdp, interest, inflation, prices, goods, services, growth, wage, produced, base, 2000, $100, variables, buy, 6%, wages, value, since, same, product, gross, expressed, domestic, country, bond, basket, 2001, worth, vs, using, suppose, statistics