What is the formula for calculating an inflation-adjusted yield?

The formula for calculating an inflation-adjusted yield is correctly represented by the first choice, which can be understood through the concept of real vs. nominal yields.

In this context, 'i' represents the nominal interest rate, while 'r' refers to the rate of inflation. To find the real yield (or inflation-adjusted yield), the nominal yield must be adjusted to reflect the diminishing purchasing power of money due to inflation. The formula [(1 + i) ÷ (1 + r)] - 1 effectively converts the nominal yield into a real yield by considering how much of the nominal return is eroded by inflation.

The calculation works as follows: when you divide (1 + i) by (1 + r), you are determining the ratio of the effective growth of your investment, factoring in inflation. The result reflects the percentage increase, and subtracting 1 gives the net real yield. The final multiplication by 100 converts this value into a percentage format, which is the easier and more common way to express yields.

This approach highlights the importance of understanding the relationship between nominal yields and inflation, allowing investors to gauge their actual purchasing power gain from their investments after accounting for inflation.