Investors who purchased bonds several years ago enjoyed double digit yields. These same investors today are complaining loudly about the current low single digit returns. Are investors that much worse off today? Explain what investors should be considering and how to determine whether they are better off or worse off today than they were several years ago.

Investors are comparing the nominal rates of return. The important thing to consider is the real rate of return, which considers the effects of inflation. If the real rate of return has held constant, then investors are neither better nor worse off than they were previously. If the real rate of return has increased, then investors are actually better off even though the nominal rate of return decreased significantly. Only if the real rate of return has decreased would investors be worse off. The Fisher formula should be mentioned as the method of determining the real rate of return.