Inflation Adjusted Return

By: EconomyWatch   Date: 14 October 2010

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There are many ways by which investments can be saved from the ill effects of inflation. Classical example is furnished by the United States Treasury, offering various inflation protected securities. Inflation adjusted return is the real return of an investment, after removal of the effects of inflation. Owing to inflation, the purchasing power of money declines. In that case, the inflation adjusted return should be such, that even though inflation diminishes the purchasing power of money in no way affects the real return of investment. By doing so, the value of money remains at least stable and does not wither away with time.

Negating the ill effects of inflation:
If the ill effects of inflation are negated from an investment, the actual return (on investment) can be realized. If a bond held by an investor is 5% for a period of one year and if the rate of inflation for the same period was 8%, the real return is -3%. Hence investment ought to be calculated accordingly, so that the real return or inflation adjusted return is not negative.
RRB or Real Return Bonds:
Investing in real return bonds (RRB) or bonds, which have the provision of inflation adjusted return, offer a good solution for the investors from allowing their savings to be gnawed away because of inflation. This also holds true for people approaching retirement or have already retired. Inflation is measured by the CPI or the consumer price index. If inflation is prevailing in a particular economy and individuals intend to safeguard their savings and investment, investing in inflation adjusted returns is preferable.
Federal Real Return Bonds or inflation adjusted return:
The RRBs, which are issued by the Federal government in the United States of America, have nominal yield of 7.4 percent. During the time of issuance of these bonds, the indicated yield was 4 percent to 4.25 percent. Changes in the CPI or the consumer price index were recorded, which added up to give rise to the nominal yield.


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