Real vs money interest rates

Nominal interest rates quoted in markets are money rates — they measure growth in currency units. When prices rise (inflation), a given money return buys less real goods. Actuaries separate money interest from real interest (growth in purchasing power).

Inflation and real returns

Let $i$ be the money (nominal) effective annual interest rate and $q$ the effective annual inflation rate. Rs. 1 invested today grows to $(1+i)$ in money terms after one year, but prices have risen by factor , so purchasing power is

Prerequisites

Inflation and real returns

Why the distinction matters

Worked example: Real rate from money and inflation

Worked example: Required money rate for a real target

What mastery requires

Practice

Practice 1

Practice 2

Practice 3

Practice 4

Practice 5

Practice 6

Practice 7

Practice 8

Practice 9

Synthesis practice

Practice 1

Practice 2

Mastery checks