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Simple English definitions for legal terms
real rate
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A quick definition of real rate:
Real rate: The real rate is another term for interest rate. It is the amount of money that a lender charges a borrower for borrowing money. For example, if you borrow $100 and the interest rate is 5%, you will have to pay back $105. The real rate takes into account inflation, which is the increase in the cost of goods and services over time. This means that the real rate is the interest rate adjusted for inflation.
A more thorough explanation:
Definition: The real rate is the interest rate adjusted for inflation. It represents the actual return on an investment after accounting for the impact of inflation.
For example, if the nominal interest rate on a savings account is 5% and the inflation rate is 2%, the real rate of return is 3%. This means that the investor is earning a 3% return on their investment after accounting for the impact of inflation.
Another example would be if a bond has a nominal interest rate of 7% and the inflation rate is 3%, the real rate of return would be 4%. This means that the investor is earning a 4% return on their investment after accounting for the impact of inflation.
The real rate is important because it allows investors to compare the true returns of different investments. A high nominal interest rate may seem attractive, but if the inflation rate is also high, the real rate of return may be low or even negative.