A bond that pays interest annually yields a rate of return of 5.75 percent. The inflation rate for the same period is 3 percent. What is the real rate of return on this bond?

To find the real rate of return on the bond, you can use the Fisher equation: \( (1 + nominal rate) = (1 + real rate) \times (1 + inflation rate) \). Plugging in the numbers, rearranging, and calculating gives you a real rate of return of approximately 2.69 percent. This means that after accounting for inflation, your purchasing power is still growing, just at a slower pace than the nominal return might suggest! When investing in bonds or any fixed-income assets, it’s essential to consider interest rates and inflation together. A common mistake is to focus solely on the nominal yield without factoring in how inflation can erode earnings. Always calculate the real return to understand the true increase in your wealth!