[Anonymous]

Guys, I’m so confused with all the different types of interest rates… would someone be so kind as to list them out with a brief definition? Also, are the risk-free rate and real interest rate the same thing? Thanks in advance.

[ppierce]

so nominal interest rate think nominal = normal interest rate. or the rate without taking into account inflation. the nominal rate is the rate you would see quoted in the newspaper.

however to get the ‘real interest rate' you have to take inflation into account. so the ‘real interest rate' would be the nominal or ”normal” interest rate – inflation.

i.e nominal interest rate is 10% inflation is 3% and the real interest rate would be 10%-3% or 7%.

FAR 80
REG 76
AUD 85
BEC 85
Ethics 98
DONE!!!!!!!!!!!!!!!!!!!!

[ppierce]

oh yeah the risk free rate of interest would be the interest rate of a US Gov't t-bill, note or bond. because the US Government backs those bonds the rates would be considered risk free. at least thats how i've come to understand it.

hope this helps

FAR 80
REG 76
AUD 85
BEC 85
Ethics 98
DONE!!!!!!!!!!!!!!!!!!!!

[Anonymous]

Yes, that definitely helps clear up some of my confusion. Thanks ppierce!

[ppierce]

just as an edit when i said that nominal doesn't take into account inflation and real rate takes into account inflation i meant the opposite.

Nominal Int Rate includes inflation which is why its higher. To get the Real Rate of Interest you take out or subtract inflation from Nominal Rate/

FAR 80
REG 76
AUD 85
BEC 85
Ethics 98
DONE!!!!!!!!!!!!!!!!!!!!

[Author]

Replies