What is a real return?
A real yield, also called the actual return rate, refers to the amount of money that the investor actually earns for his investment. It is the amount that the investment pays, after adjusting fees, commissions and dividends. By evaluating the actual return, the investor can determine how much the investment is to determine whether the investment is a good or poor agreement.
Many investments are presented in terms of nominal return on return. The nominal return rate is a specified percentage that the investor will do. For example, if an investor opens a bank account or buys a deposit certificate (CD), he / she is given interest rates to pay the investment. The bank can say that the account pays five percent of interest.
This cited value of interest is a nominal return rate. It does not take into account inflation. It is simply the amount of the total interest paid from the investment.
If inflation is three percent, the actual amount of interest in investors EARNS is less than five percent. Three percent of these interest costs are oneThe inflation is covered with inflation. Therefore, the actual return rate of investment is in fact only two percent.
Understanding the actual return is essential to understand how well the investment works and to understand how much money the investment will generate for the investor. For example, if an investor wants to retire, he will focus primarily on how his investment gives him to live. He is therefore interested in the amount of purchasing power that his interest dollars will buy.
In order to determine the purchasing power it will have if he tries to live out of the interest of his investment, he must know the real return. Assuming it earns five percent per year on an investment with a nominal return of five percent per year, a mistake would be serious. Since the purchasing power of Dollar would decrease by three percent with a three percent level of inflation, in fact he would only live on two percent instead of the five percent he expected.
Calculation of the actual return is onerescued. Determine any external factors that cause an increase in the value of the saved dollar. Then subtract these external factors from the nominal return rate to find out what the actual return rate will be.