To obtain an approximate estimate of the real interest rate, one must ________ the nominal risk-free rate.

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the expected inflation from the nominal risk-free rate. This is because inflation erodes the purchasing power of money over time, so we need to adjust the nominal interest rate to account for this. For example, if the nominal interest rate is 5% and inflation is expected to be 2%, the real interest rate would be 3%.

To Obtain an Approximate Estimate of the Real Interest Rate