Unit 4.2 : Nominal vs Real Interest Rates

real interest rates

percentage increase in PURCHASING POWER that a borrower pays (adjusted for inflation)

nominal interest rate - expected inflation

real interest rate =

nominal interest rate

percentage increases in MONEY that borrower pays (NOT adjusted for inflation)

real interest rate + expected inflation

nominal interest rate =

interest rate; number of years (N)

You can determine the future value of any amount of money ($X) if you know the ____ and the ____

fv = $X[(1 + ir)^N]

equation to calculate the future value of $X in N years

present value

current worth of some future amount of money

pv = $X/[(1 + ir)^N]

equation to calculate the present value of $X in N years