The Inflation-adjusted Return calculator computes the return rate based on the Inflation Rate and the Investment Return.
INSTRUCTIONS: Enter the following:
- (INV) Investment Return Rate
- (IR) Inflation Rate
Inflation-adjusted Return (IAR): The calculator computes the return value in percent.
The Math / Science
The formula for Inflation Adjusted Return is:
`IAR = ((1+ "INV")/ (1 +IR) -1)`
where:
- IAR = Inflation Adjusted Return
- INV = Investment Return Rate
- IR = Inflation Rate
The inflation-adjusted return is the measure of return that takes into account the time period's inflation rate. Inflation-adjusted return reveals the return on an investment after removing the effects of inflation. Removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security without external economic forces.
This real rate of return may be used to compare investments, especially those across international borders, as each country's inflation rate is accounted for in the return. Without adjusting for inflation, an investor may get an entirely different picture from reality when analyzing an investment's performance. For example, assume a bond investment is reported to have earned 2% in the previous year. This looks like a gain, but perhaps inflation last year was 2.5%. Essentially, this means the investment did not keep up with inflation and effectively lost 0.5%.
As another example, assume a stock returned 12% last year and inflation was 3%. An approximate estimate of the real rate of return is 9%, or the 12% reported return less the inflation amount.
References
Basic Investor Calculators
- Black-Scholes Equation: Compute the Call and Put Option based on the Black-Scholes equation and the stock or spot price, strike price, number of years to maturity, percent volatility and the risk-free rate.
- 30 Day Yield Equation: Computes the SEC's 30 day yield function for bond funds based on the income in the prior 30 days, accrued expenses in the prior 30 days, outstanding shares and max price per share.
- Investment Return Rate: Computes the return rate based on the beginning and end price and dividends paid.
- Inflation Adjusted Return: Computes the return rate based on the Inflation Rate and the Investment Return.
- Present Value- computes the present value of a fixed annuity.
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