Good to Know

Posted by Michael Campbell

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Real Interest Rates vs Nominal Rates – the difference between borrowing and lending rates (nominal rate) minus inflation = real rate.
ie 5 yr bond annual interest rate is just over 1% per year – you then subtract the inflation rate, 1.1% = real rate of negative 1/10th of 1%. In other word, if inflation stays the same bond holders lose 1/10th of 1% per year of purchasing power. Not a good time to lend (buy a bond) but a good time to borrow because borrowing money costs 1% per yr in interest but buying power of the money you pay back with will be 1.1% less.

(P.S. for gold owners – note a strong inverse correlation between gold and real interest rates. When real rates up, gold prices tend to drop)