<P> The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation . It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate . </P> <P> If, for example, an investor were able to lock in a 5% interest rate for the coming year and anticipated a 2% rise in prices, they would expect to earn a real interest rate of 3% . The expected real interest rate is not a single number, as different investors have different expectations of future inflation . Since the inflation rate over the course of a loan is not known initially, volatility in inflation represents a risk to both the lender and the borrower . </P>

Nominal interest rate minus the rate of inflation equals