Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A yield tells you how much money you earn, and a real yield tells you how much buying power you keep. A 5 percent nominal yield with 3 percent inflation is a real yield of about 1.94 percent, slightly under the simple 2 percent subtraction, because the two effects compound. When inflation exceeds the nominal yield, the real yield is negative, and the investment loses buying power even as the balance grows.
Before you rely on it
What to check
Choose an inflation assumption that fits your own spending and test more than one. The real yield moves nearly one for one with it.
The common error
Where people go wrong with real yield calculator
Reading a nominal yield as the growth of your purchasing power. A high nominal yield in a high-inflation year can still be a loss in real terms.
Sensitivity evidence
How nominal annual yield changes the estimated real yield
| Nominal annual yield | Estimated real yield | Simple nominal-minus-inflation spread |
|---|---|---|
| 3.0% | 0.000% | 0.000% |
| 4.0% | 0.971% | 1.0% |
| 5.0%worked example | 1.9% | 2.0% |
| 6.0% | 2.9% | 3.0% |
| 7.0% | 3.9% | 4.0% |
Every input, tested
Which input moves the estimated real yield most
| Input | Tested from | To | Estimated real yield at each end | Swing |
|---|---|---|---|---|
| Annual inflation rate | 2.0% | 4.0% | 2.9% to 0.962% | 2.0% (102%) |
| Nominal annual yield | 4.0% | 6.0% | 0.971% to 2.9% | 1.9% (100%) |
Two variables at once
Estimated real yield by nominal annual yield and annual inflation rate
| Nominal annual yield \ Annual inflation rate | 1.0% | 3.0% | 5.0% |
|---|---|---|---|
| 3.0% | 2.0% | 0.000% | -1.9% |
| 4.0% | 3.0% | 0.971% | -0.952% |
| 5.0% | 4.0% | 1.9% | 0.000% |
| 6.0% | 5.0% | 2.9% | 0.952% |
| 7.0% | 5.9% | 3.9% | 1.9% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Nominal annual yield | 5.0% |
| Annual inflation rate | 3.0% |
| Estimated real yield | 1.9% |
| Simple nominal-minus-inflation spread | 2.0% |
Where the inputs come from
Nominal annual yield is the stated return on a bond, deposit or investment, and annual inflation rate is your assumption for the period, ideally the expected average over the holding period. For a bond, use the expected inflation over its remaining life, not last year's. The real yield adjusts the nominal yield by dividing, which is more accurate than subtracting when inflation is high.
When the result stops applying
Inflation is uncertain, so the real yield on a nominal bond is an expectation that can be wrong. Taxes apply to nominal returns, so after-tax real yields are lower. Different inflation measures give different answers, and your personal inflation may differ from the index. TIPS provide a real yield that is known at purchase.
What to compare it with
Project inflation on the inflation calculator, and compare with inflation-protected bonds on the TIPS calculator. The real wage page applies the same idea to pay. The yield to maturity and CD calculators supply nominal yields.
People also ask
Frequently asked questions
What is a real yield?
The return on an investment after adjusting for inflation, showing the change in purchasing power rather than the number of dollars.
Why divide instead of subtracting inflation?
The exact relationship is one plus the nominal rate divided by one plus inflation. Subtraction is a close approximation at low rates.
What is a negative real yield?
A situation where inflation exceeds the nominal yield, so the investment loses buying power over time.