Quite often you can see, at first glance, advantageous offers that promise to ensure financial independence. It can be both bank deposits and opportunities for investment portfolios. But is everything so profitable, as the advertisement says? We will talk about this in the framework of the article, finding out what is the nominal rate and the real rate.
Interest rate
But first, let's talk about the basis of the basics in this matter - the interest rate. It reflects nominally the benefits that a certain person can get when investing in something. It should be noted that there are quite a few opportunities to lose your savings or the interest rate that a person should get:
- Nebula of the drawn up contract;
- Unforeseen situations (crisis of an enterprise or banking institution, as a result of which it ceases to exist).
Therefore, it is necessary to study in detail what you are going to invest in. It should be remembered that the interest rate is often a reflection of the riskiness of the project under study. So, the safest are those that offer a profitability level of up to 20%. The high-risk group includes assets that promise up to 70% per annum. And all that is larger than these indicators is a danger zone into which you should not meddle without experience. Now that there is a theoretical basis, we can talk about what the nominal rate and the real rate are.
Nominal rate concept
Determining the nominal interest rate is very simple - it means the value that is given to market assets and evaluates them without inflation. An example is you, the reader, and a bank that offers a deposit at 20% per annum. For example, you have 100 thousand rubles and want to increase them. Therefore, they put it in the bank for one year. And at the expiration of the term they took 120 thousand rubles. Your net profit is as much as 20, 000.
But is this really so? Indeed, during this time, food, clothing, travel could have risen in price significantly - and, say, not by 20, but by 30 or 50 percent. What to do in this case to get a real picture of things? What do you still need to give preference to when choosing? What should be chosen as a guideline for yourself: the nominal rate and the real rate, or one of them?
Real rate
For such cases, there is such an indicator as the real rate of return. It is noteworthy that it can be quite easily calculated. To do this, the expected inflation rate should be taken away from the nominal rate. Continuing the example given earlier, we can say this: you put 100 thousand rubles in the bank at 20% per annum. Inflation was only 10%. As a result, the net nominal profit will be 10 thousand rubles. And if you adjust their value, then 9, 000 according to the purchase opportunity of last year.
This option allows you to get, albeit insignificant, but profit. Now we can consider another situation in which inflation was already 50 percent. One does not need to be a genius of mathematics in order to understand that the state of affairs compels one to look for some other way to save and increase their funds. But all this was in the style of a simple description. In economics, the so-called Fisher equation is used to calculate all this. Let's talk about him.
Fisher's equation and its interpretation
Talking about the difference that they have a nominal rate and a real rate is possible only in cases of inflation or deflation. Let's look at why. For the first time, the idea of the relationship between nominal and real rates with inflation was put forward by economist Irving Fisher. In the form of a formula, everything looks like this:
NS = RS + OTI
NA - this is the nominal interest rate of return;
OTI - the expected rate of inflation;
RS is the real bet.
The equation is used to mathematically describe the Fisher effect. It sounds like this: the nominal interest rate always changes by the amount at which the real rate remains unchanged.
It may seem difficult, but now we will examine in more detail. The fact is that when the expected rate of inflation is 1%, the face value also grows by 1%. Therefore, it is impossible to create a high-quality process of making investment decisions without taking into account the differences between rates. Earlier you just read about the thesis, but now you have mathematical proof that everything described above is not a simple invention, but, alas, a sad reality.
