4.2 Nominal v. Real Interest Rates

Real =

Nominal interest rate- expected inflation

Nominal Interest Rates

the percentage increase in money that the borrower pays(not adjusted for inflation)

Equation for Future Value

$X in N Years = $X(1 + ir)^N

The equation for Calculating Present Value

Present Value of $X in 1 Year= $X/(1+ir)^N

Nominal=

Real Interest rate+ expected inflation

Present Value

The current worth of some future amount of money.

Real Interest Rates

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

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

interest rate (ir) and the number of years (N).