Real yield is the return on an investment after accounting for inflation. Real yield is calculated by subtracting the inflation rate from the nominal yield of a bond or other fixed income security.
What is the real yield of a bond with a nominal yield of 6% and an inflation rate of 3%?
Correct!
Not Correct
Select an option above to see an explanation here.
A) The real yield is calculated by subtracting the inflation rate from the nominal yield (6% - 3% = 3%). B) This would result if the nominal yield and inflation rate were added together, which is incorrect. C) This would result if the nominal yield were divided by the inflation rate, which is incorrect. D) This would result if the nominal yield were divided by 2, which is incorrect.
Which of the following securities is designed to protect investors from inflation?
A) Corporate bonds are not specifically designed to protect investors from inflation. B) TIPS are designed to protect investors from inflation by adjusting the principal value of the bond based on changes in the Consumer Price Index. C) Municipal bonds are not specifically designed to protect investors from inflation. D) Preferred stocks are not specifically designed to protect investors from inflation.
What is the breakeven inflation rate if the yield on a 10-year nominal bond is 4% and the yield on a 10-year inflation-linked bond is 2%?
A) This would be the result if the nominal bond yield were divided by the inflation-linked bond yield, which is incorrect. B) The breakeven inflation rate is the difference between the yield on a nominal bond and the yield on an inflation-linked bond of the same maturity (4% - 2% = 2%). C) This would be the result if the nominal bond yield were added to the inflation-linked bond yield, which is incorrect. D) This would be the result if the nominal bond yield were used as the breakeven inflation rate, which is incorrect.
In the 1970s, high inflation rates eroded the purchasing power of fixed-income investments, leading to the development of inflation-indexed bonds, such as Treasury Inflation-Protected Securities (TIPS), to help investors preserve their purchasing power.
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Example Series 65 Example Practice Question
An investor purchases a 10-year bond with a nominal yield of 5%. For example, if the annual inflation rate is 2%, the real yield on the bond is 3% (5% - 2%).
To find the real yield, here's the deal, subtract inflation from nominal, and that's the appeal.
Real Yield = (Nominal Yield - Inflation Rate) / (1 + Inflation Rate)
Suppose an investor holds a bond with a nominal yield of 6%, and the current inflation rate is 2%. To calculate the real yield: Real Yield = (0.06 - 0.02) / (1 + 0.02) Real Yield = 0.04 / 1.02 Real Yield = 0.0392 or 3.92%