How Does a Real Interest Rate Affect Investment Returns?
A real interest rate is the nominal (or stated) interest rate less the rate of inflation. For investments, the inflation rate will erode the value of an investment's return by decreasing the rate of return. For example, if the rate of return for bonds you hold is 6% and the inflation rate is 3%, then the real rate of return will be 3%, not 6%. That's because the interest rate of 6% is adjusted downward by 3% to account for the unfortunate power of inflation to erode value (6% - 3% = 3%).