#2 Real interest rate: Real interest rate is the deposit interest rate adjusted for inflation. If your inflation is higher, your real interest rate goes lower and vice versa. The real interest rate is the growth rate of purchasing power derived from an investment.

By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time. For example, if you are earning 4percent interest per year on the savings in your bank account, and inflation is currently 3 percent per year, then the real interest rate you are receiving is 1 percent (4 percent - 3 percent = 1 percent). The real value of your savings will only increase by 1 percent per year, when purchasing power is taken into consideration.

#3 Effective interest rate: When you earn interest on your prior interests it increases your total return. You get an interest amount on a monthly or quarterly basis, which too earns an interest by the end of the year. So, the total interest you earn is called the annual effective interest rate. Thus, your effect interest rate is higher than your nominal interest rate.

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