Real interest rate using Fisher equation

When you receive the repayment of principal plus interest at the end of a year, interest is calculated using the nominal interest rate. However, if there is inflation, your money lost some buying power, compared against the buying power of the principal amount at the time it was deposited. So, if you want to get your real interest rate, you should take inflation into account. The relationship between nominal and real interest rates under inflation is given by the Fisher equation, named after Irving Fisher.

The Fisher equation is:

,

where
- nominal interest rate
- real interest rate
- inflation rate

Hence, the real interest rate would be

Note that for small rates (several percents) Fisher equation can be approximated as

Real interest rate using Fisher equation

Nominal interest rate, per annum (percents)

Inflation, per annum (percents)

Real interest rate (percents)

 

Calculation precision

Digits after the decimal point: 1

Calculate

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