4.2: Nominal vs Real Interest Rates

Question 1

Real Interest Rates

Equation

Answer 1

The percent increase in purchasing power that a borrower pays (adjusted for inflation)

Real = Nominal IR - Expected Inflation

Question 2

Nominal Interest Rates

Equation

Answer 2

The percentage increase in purchasing power that a borrower pays that is not adjusted for inflation

Nominal = Real IR + Expected Inflation

Question 3

Future Value Equation

Answer 3

$X in N years = $X (1+IR)^N

$x = amount of money
IR = interest rate

Question 4

Present Value

Equation

Answer 4

The current worth of some future amount of money

Present value of $X in N years = ($X)/ (1+IR) ^N