Case Interview Prep

Answer: D - The main difference between nominal and real interest rates is that the latter accounts for inflation

Key Takeaway: When calculating real interest rates, the lender is compensated for loss of value through a consideration of inflation. The relationship between the two can be described in this equation: real interest rate = nominal interest rate - calculated inflation. In many cases, the inflation component of future interest rates can only be estimated and those estimates may or may not be equivalent to the real inflation amounts.