Calculate the bill's holding-period cash return first, then compare it with inflation for that same period. An annualized auction yield and an unmatched inflation figure do not answer that question on their own.
Start with the actual cash invested and received
For a discounted bill held to maturity, identify the purchase outlay and the face amount received. Include applicable costs on the correct dates. The cash difference, divided by the outlay, gives a holding-period return for a simple beginning-to-end investment.
In a fictional example, an all-in outlay of ETB 10,000 becomes ETB 10,500 at the end of the holding period. The cash gain is ETB 500, which is 5% of the ETB 10,000 outlay.
That 5% belongs to the period in the example. It should not be replaced with a published annual yield simply because both figures are percentages. An early sale would also need the actual sale proceeds rather than an assumed maturity repayment.
Measure the price change over the same period
Inflation describes an increase in a price level. If a basket costing ETB 100 at the start costs ETB 103 at the end, its price level has risen by 3%. The money needed to buy that same basket has changed.
Use dates compatible with the investment period. A year-on-year inflation figure describes a twelve-month comparison. It cannot simply be treated as the price increase during a 91-day holding, and dividing it by four does not establish the actual price change in that quarter.
Where suitable price-index observations for the start and end are available, compare those observations. If a future price change is being assumed instead, label the result as a scenario rather than a measured investment outcome.
See how the same cash gain can produce different outcomes
Keep the nominal holding-period gain at 5% and vary only the assumed price change over the same period. With no price increase, the real gain is also 5%. With 3% inflation, the real gain is about 1.94%. With 7% inflation, the real return is about negative 1.87%.
In the last case, ETB 10,500 is more money than the original ETB 10,000. But a basket initially costing ETB 10,000 would now cost ETB 10,700. The investment cannot buy the full original basket despite the cash gain.
Hypothetical outcomes, not current inflation or yield quotations| Nominal gain in the illustration | Price change over the same period | Real return |
|---|
| 5% | 0% | 5.00% |
| 5% | 3% | About 1.94% |
| 5% | 7% | About −1.87% |
Use the result for the question it answers
A real-return calculation helps explain purchasing power over a specified period. It does not forecast the next auction yield or guarantee the prices an individual household or business will face.
A broad price index represents its own basket. A household's spending or a business's planned inputs may change differently. For a known future expense, also consider the cost and due date of that particular expense rather than relying entirely on a general inflation measure.
The useful final statement identifies the initial outlay, final cash, holding period and matching price change. That keeps a measured result separate from a future assumption and makes the conclusion easy to understand.
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