The real rate of interest is the risk free rate minus the inflation premium.

Question

Quizplus · Accepted Answer

This is the correct formula for calculating the real rate of interest. The risk-free rate is a baseline rate that is considered to be free of default risk, such as the interest rate on U.S. Treasury Bonds. The inflation premium is the amount of compensation investors require to protect against inflation eroding the buying power of their investments. Therefore, subtracting the inflation premium from the risk-free rate yields the real rate of interest, which reflects the true increase in purchasing power that investors will see from their investments.

The Real Rate of Interest Is the Risk Free Rate