Real interest rate

The real interest rate is the stated interest rate associated with an investment or loan, minus the inflation rate. For example, an investor is evaluating whether to invest in a financial instrument that pays 5% per year. The current inflation rate is 3%, so the real interest rate associated with the prospective investment is the net of the two figures, which is 2%. If the inflation rate had instead been 6%, then the real interest rate would be negative 1%. This is a valuable concept when there is a significant inflation rate, or when the inflation rate is projected to increase.