About Inflation Premium Calculator (Formula)
Inflation Premium is a measure of the minimum amount of return that an investor requires to compensate for the risk of inflation. It represents the difference between the yield on a Treasury bond and the yield on an inflation-protected security, such as a Treasury Inflation-Protected Security (TIPS).
The formula for calculating the Inflation Premium is given by:
IP = (1 + Nominal Rate) / (1 + Real Rate) – 1
- IP is the Inflation Premium
- Nominal Rate is the rate of return of a security without taking inflation into account
- Real Rate is the rate of return adjusted for inflation
It is important to note that in order to calculate the inflation premium accurately, both the Treasury bond and the inflation-protected security must have the same coupon rate, redemption value, maturity, and so on.