Real yield or Real interest rate is the nominal interest that adjusts to get rid of the results of inflation that reflects the real cost of funds to the borrower and real yield to an investor.

It is the nominal yield of the bond deducting the rate of inflation. Simply, if the rate of return is 10% and the rate of inflation is 5% then the real yield for an investor would be 5%.

To Understand the real yield or real interest rate it is crucial to know what inflation is. Inflation is basically the rise in the prices of goods and services.

Inflation plays a crucial role in determining the value of any investment as it ultimately determines the purchasing power of an individual. For example, if the rate of inflation for a particular quarter is 6% and the rate of return generated by a particular investment is 6% then the value of that security is neutral since there is no gain or loss for an investor. If the return goes up or down with a greater margin it determines if the investor is able to save and spend out of the earnings.

Knowing your real yield gives you a clear picture of what your investment is giving you after factoring in inflation.

Treasury Inflation-Protected Security is a bond indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money which means it moves as per the inflation movement.

Government bonds are fixed-rate bonds with a maturity of up to 30 years. In order to estimate the real yield, comparing two securities of Treasury fixed-rate bond and Treasury Inflation-Protected Security having the same maturity is very essential.

Real Yield = Nominal Yield - Inflation (expected or actual)

However, the real yield of an investment is not the only factor to take into account. Investors should look at other factors as well equally such as their purpose of investment, time horizon to hold their investments, and their risk appetite.

Making an investment decision it is crucial to take both the nominal yield as well as the real yield into account which would ultimately manage the purchasing power of your savings.

Bondskart has a team of experts that guides you through the investment decision process.