Interest Rates: Nominal and Real
an interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. interest rates are the primary yardstick for measuring how much return lenders will get. however, the stated interest rate on a loan, sometimes called the nominal rate, doesn't tell the whole story. because of inflation, the purchasing power of every dollar lent out to an individual or a business tends to decrease over time. lenders take this into account by calculating what's known as the real interest rate. take a one year bond that offers a nominal interest rate of 6% annually. the lender doesn't know exactly what the inflation rate will be, but figures that will be close to 4% over the upcoming year. the expected real interest rate is the nominal rate minus the inflation rate. we are left with a real interest rate of 2%. while 6% may sound like a good return, the investment pays far more less when you consider that the funds could be worth 4% less the following year. of course, the precise impact of inflation can only be calculated after maturity. when a lender or an investor subtracts the actual inflation rate from the nominal rate, he or she arrives at the realized real interest rate. in our example, if inflation turned out to be 5% instead of 4%, the real return would only be 1%. interest rates are affected by a number of factors including the demand and supply of money in the economy, international forces such as a crisis in an oil producing country and actions of the federal government. interest rates play an important role in our investing decisions as a change in the rates affects the equity and fixed income markets.
- fixed income market・・・確定利付債券市場