Financial Modeling Tutorials
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 Sensitivity Analysis in Excel
 Time Value of Money
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 Present Value vs Future Value
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 Present Value of an Annuity
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 Annuity Formula
 Annuity vs Perpetuity
 Annuity vs Lump Sum
 Internal Rate of Return (IRR)
 NPV vs XNPV
 NPV vs IRR
 NPV Formula
 PV vs NPV
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 Break Even Point
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 Payback period Formula
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 Profitability Index
 Cash Burn Rate
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 Simple Interest vs Compound Interest
 Simple Interest Formula
 CAGR Formula (Compounded Annual Growth Rate)
 Effective Interest Rate
 Loan Amortization Schedule
 Mortgage Formula
 Loan Principal Amount
 Interest Rate Formula
 Rate of Return Formula
 Effective Annual Rate
 Effective Annual Rate Formula (EAR)
 Daily Compound Interest
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 Discount Rate vs Interest Rate
 Rule of 72
 Geometric Mean Return
 Real Rate of Return Formula
 Continuous compounding Formula
 Weighted average Formula
 Average Formula
 Average Rate of Return Formula
 Mean Formula
 Weighted Mean Formula
 Harmonic Mean Formula
 Median Formula in Statistics
 Range Formula
 Expected Value Formula
 Exponential Growth Formula
 Margin of Error Formula
 Decrease Percentage Formula
 Percent Error Formula
 Holding Period Return Formula
 Cost Benefit Analysis
 Cost Volume Profit Analysis
 Opportunity Cost Formula
 Mortgage APR vs Interest Rate
 Regression Formula
 Correlation Coefficient Formula
 Covariance Formula
 Coefficient of Variation Formula
 Sample Standard Deviation Formula
 Relative Standard Deviation Formula
 Volatility Formula
 Binomial Distribution Formula
 Quartile Formula
 P Value Formula
 Skewness Formula
 Regression vs ANOVA
 Real Rate of Return Formula
 Real Rate of Return Formula Calculator
 Real Rate of Return Formula Template
Real Rate of Return Formula
Real rate of return formula helps an investor find out what actually he gets in return for investing a specific sum of money in an investment.
For example, if Mr Timothy invests $1000 into a bank and bank promises to offer 5% rate of return, Mr Timothy may think that he is getting a good return on his investment. In financial terminology, we will call this 5% as nominal rate.
However, the question remains, is 5% the actual return on Mr Timothy’s investment? The answer is no. We also need to consider inflation and also tax (if the return on investment is not tax deductible).
By considering the inflation rate, we can calculate the real rate of return. Here’s the formula –
Example of Real Rate of Return Formula
Let’s take a simple example to illustrate the real rate of return formula.
Ms. Soul has kept $100,000 in a bank. The bank promises to pay 6% rate of return at the end of the year. The inflation rate is 3% during the year. What would be the real rate of return?
By using the formula of real rate of return, we get –
 Real Rate of Return = (1 + Nominal Rate) / (1 + Inflation Rate) – 1
 Or, Real Rate of Return = (1 + 0.06) / (1 + 0.03) – 1
 Or, Real Rate of Return = 1.06 / 1.03 – 1
 Or, Real Rate of Return = 0.0291 = 2.91%.
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Explanation of Real Rate of Return Formula
Let’s look into the formula of the real rate of return.
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In this formula, we’re first considering the nominal rate and then we will consider the inflation rate.
As you already know – the rate of return on the investment or the bank offers is the nominal rate of return. However, to find out the inflation rate, we need to use the consumer price index. Alternatively, the businesses can use a different consumer price index to calculate the inflation or they can only take the goods and services into account that are related to their business.
Here’s the formula by using which we can find out the inflation rate –
Rate of Inflation = (CPI _{x+1 }– CPI_{ x}) / CPI _{x}
Here, CPI _{x }means initial consumer index.
If you have invested a good amount, it’s always prudent to use the real rate of return to see how much you’re actually earning on the investment.
However, if you just want to make sure how much you’re actually making in a casual sense, you can just use the following formula – (nominal rate – inflation rate).
Though this formula is not recommended, you can just check before going into detail.
Use of Real Rate of Return Formula
As you can see already, the real rate of return is quite useful to the investors.
If the investors want to know how much they are actually making (in some cases it is actually negative), In this formula is a good one.
However, there are two things you need to consider before using this formula.
 The first thing is to deduct the inflation rate (or to divide the inflation rate); you need to make sure that you will purchase the same goods the CPI considers.
 The second thing is the rate of return is not always accurate. Yes, you can calculate the real rate of return by using the formula, but there can be more factors that you may need to consider e.g. taxes, opportunity cost etc.
Real Rate of Return Calculator
You can use the following Real Rate of Return Calculator.
Nominal Rate  
Inflation Rate  
Real Rate of Return Formula =  
Real Rate of Return Formula = 



Real Rate of Return in Excel (with excel template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Nominal Rate and Inflation Rate.
You can easily calculate the real rate of return in the template provided.
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This has been a guide to Real Rate of Return formula, its uses along with practical examples. Here we also provide you with Real Rate of Return Calculator with downloadable excel template. Here are the other suggested articles –
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