The nominal and real interest rate is ... The level of real interest rates

The most important characteristic of the modern economy is the depreciation of investment through inflationary processes. This fact makes it expedient to apply not only a nominal but also a real interest rate in making certain decisions in the loan capital market . What is the interest rate? What does it depend on? ? How to determine the real interest rate ?

The concept of interest rates

The interest rate should be understood as the most important economic category, reflecting the profitability of an asset in real terms. It is important to note that it is the interest rate that plays a decisive role in the process of making managerial decisions, because any subject of the economy is very interested in obtaining the maximum level of revenue with minimal costs in the course of its activities. In addition, every entrepreneur, as a rule, reacts to the dynamics of the interest rate in an individual way, because in this case the determining factor is the type of activity and the industry in which, for example, the production of a particular company is concentrated.

Thus, owners of capital funds often agree to work only under the condition of extremely high interest rates, and borrowers are likely to acquire capital only in the case of low interest. The examples considered are clear evidence that today it is very difficult to find a balance in the capital market.

Interest rates and inflation

The most important characteristic of a market economy is the presence of inflation, which determines the classification of interest rates (and, naturally, the yield coefficient) on the nominal and real. This allows you to fully assess the effectiveness of financial transactions. In case of excess of the inflation rate in relation to the interest rate received by the investor for investments, the total of the corresponding transaction will be negative. Of course, in terms of absolute magnitude, its funds will increase significantly, that is, for example, in rubles it will have more money, but the purchasing power, which is characteristic of them, will significantly drop. This will lead to the possibility of a new amount to buy only a certain amount of goods (services), less than it would have been possible before the beginning of this operation.

Distinctive features of nominal and real rates

отличаются лишь в условиях инфляции или же дефляции. As it turned out, the nominal and real interest rates differ only in conditions of inflation or deflation. Under inflation should be understood as a significant and sharp increase in prices, and under deflation - their significant decline. покупательная способность, присущая доходу и обозначаемая как процент. Thus, the rate that is appointed by the bank is considered to be nominal, and the real interest rate is the purchasing power inherent in income and denoted as a percentage. In other words, the real interest rate can be defined as nominal, which is adjusted for the inflation process.

от номинальных. Irving Fisher, an American economist, has formed a hypothesis explaining how the level of real interest rates depends on the nominal. The basic idea of the Fisher effect (the so-called hypothesis) is that the nominal interest rate has the property of changing so that the real one remains "fixed": r (n) = r (p) + i . The first indicator of this formula displays the nominal interest rate, the second - the real interest rate, and the third element is equal to the expected rate of inflationary processes expressed in percentage terms.

The real interest rate is ...

A striking example of the Fisher effect discussed in the previous chapter is the picture when the expected rate of the inflationary process is equated to one percent per year. Then the nominal interest rate will also increase by one percent. But in fact the real percentage will remain unchanged. This proves that the real interest rate is the same nominal interest rate, but minus the estimated or actual inflation rate. This rate is fully cleared of inflation.

Calculation of

The real interest rate can be calculated as the difference between the nominal interest rate and the level of inflationary processes. следующему отношению: r(р) = (1 + r(н)) / (1 + i) – 1 , где рассчитываемый показатель соответствует реальной ставке процента, второй неизвестный член отношения определяет номинальную ставку процента, а третий элемент характеризует уровень инфляции. Thus, the real interest rate is equal to the following ratio: r (p) = (1 + r (n)) / (1 + i) -1 , where the calculated indicator corresponds to the real interest rate, the second unknown member determines the nominal interest rate, and The third element characterizes the level of inflation.

Nominal interest rate

покупательная способность дохода). In the process of talking about credit rates, as a rule, we are talking about real rates (the real interest rate is the purchasing power of income). But the fact is that they can not be observed directly. Thus, when concluding a loan agreement, an economic entity is provided with information on nominal interest rates.

Under the nominal interest rate, one should understand the practical characterization of the interest in quantitative terms, taking into account the actual prices. At this rate, a loan is issued. It should be noted that it can not be greater than zero or equal to it. The only exception is a loan on terms of free. The nominal interest rate is nothing more than a percentage expressed in monetary terms.

Calculation of the nominal rate of interest

Suppose, according to an annual loan of ten thousand monetary units, 1200 monetary units are paid as a percentage. Then the nominal interest rate is equal to twelve percent per annum. After receiving a loan of 1,200 monetary units, will the lender get rich? Competently answer this question can only be accurately knowing how the prices during the year will change. Thus, with annual inflation equal to eight percent, the creditor's income will become more only by four percent.

The calculation of the nominal interest rate is as follows: r = (1 + percent of income received by the bank) * (1 + inflation rate increase) - 1 or R = (1 + r) × (1 + a), where the main indicator is the nominal interest Rate, the second - the real interest rate, and the third - the rate of inflation in the relevant calculations of the country .

conclusions

Between the nominal and real interest rates, there is a close relationship, which for the sake of absolute understanding, it is advisable to present as follows:

1 + nominal interest rate = (1 + real interest rate) * (price level at the end of the time period / price level at the beginning of the time period under consideration) or 1 + nominal interest rate = (1 + real rate of interest) * (1 + rate Inflationary processes).

It is important to note that the real effectiveness and productivity of operations performed by the investor is reflected only by the real interest rate. It speaks of the increase in the purchasing power of the funds of this economic entity. The nominal interest rate can only reflect the magnitude of the increase in cash in absolute terms. It does not take inflation into account. говорит о росте уровня покупательной способности денежной единицы. An increase in the real interest rate indicates an increase in the purchasing power of a monetary unit. And it is equally possible to increase consumption in future periods. Hence, this situation can be treated as a reward for current savings.