Interest Rates, Inflation & The Economy

Annual Percentage Rate (APR)

Indicates the amount of simple interest earned (incurred) in one year, without the effect of compounding.

Effective Annual Rate (EAR)

The actual interest rate earned (or incurred) over a year, taking into account compounding.

Periodic Interest Rate

The interest rate for each compounding period, derived from the APR.

Nominal Rate of Return

The unadjusted rate of return that does not account for inflation.

Real Rate of Return

A rate of return adjusted for the effects of inflation, reflecting the actual increase in purchasing power.

Consumer Price Index (CPI)

A measure that examines the average change over time in the prices paid by consumers for goods and services, used as a proxy for inflation.

Yield Curve

The relationship between yields and time to maturity for fixed-income securities.

Opportunity Cost of Capital

The best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Ex post returns

Historical realized returns after the fact.

Ex ante returns

Expected returns based on predictions before the outcomes are realized.