2

I’m thinking of starting a CD ladder. The rates for CDs are expressed as an annual percentage yield (APY), while the inflation rate is expressed as a percentage per year. How do you convert between these two rates to decide, for example, whether a given investment will yield enough interest to match the current inflation rate? Can these percentages just be compared directly?

3

There is no conversion, and for low rates, there isn't any difficult math.

To get the so-called "real interest rate", simply subtract the current inflation rate from the interest rate.

You can make it more detailed by projecting inflation and interest rates, but then you'd probably be the best bond fund manager in the world if you could do it accurately and precisely, so it might be best to just stick to the simple rates presented.

Therefore, for the CDs you're comparing, for each one, do:

APY - inflation = real APY

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.