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Real Yield

A

Anne Marie

Member
What is the difference between the real yield and the nominal yield and when would each be used?
thank you
 
A real yield is real, and anything else is fictional. (Only joking). A real yield is the yield above inflation that can be locked in by an index-linked bond. So if the real yield on an IL bond was 1% at its current price, the buyer will get 1% + whatever inflation turns out to be over the coming years. At the moment, due to QE, they are negative because bond prices are so high. Real yields exist at all terms from 1 year to 50 years, and they are different at each term. A special one is the short-term real interest rate, which is the bank of england base rate, less the current rate of inflation, as this shows how much stimulus the BofE is trying to pump into the economy. It is at present about (0.5% - 1.5% = -1%). Nominal yields are just government bond conventional yields. Real yields can be used when discounting amounts that are set in "todays prices", ie they amounts have not been increased in future in line with expected inflation. Nominal yields would be used to discount future amounts that allow for everything, including expected inflation.
 
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