How is the real interest rate for a bond calculated?

The real interest rate for a bond is calculated by subtracting the current inflation rate from the bond's yield. This calculation reflects the true purchasing power of the interest earned on the bond after accounting for inflation.

When investors hold bonds, they receive interest payments based on nominal yields; however, inflation can erode the purchasing power of those payments. By subtracting the inflation rate from the bond yield, the real interest rate provides a clearer picture of how much investors are truly earning in terms of real value. This adjustment is crucial for making informed decisions about investments, as it allows investors to understand the effective return they are receiving relative to rising prices in the economy.

The other options either misinterpret the relationship between yields and inflation or include unrelated factors like the prime rate, which does not directly measure the effect of inflation on bond returns.