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Inflation Risk |
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Inflation risk Also called purchasing power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative. Inflation Risk The risk that the rate of inflation will exceeds the rate of return on an investment. For example, if the rate of inflation is 5% over a year and the rate of return is 3%, then the investor has effectively taken a loss even though he/she has made a profit in absolute terms. Inflation risk applies especially to fixed-return securities as there is no possibility that the rate of return will increase to surpass inflation. For this reason, some fixed-return securities are inflation-indexed, which means that their nominal returns change, while their real returns stay the same. See also: Treasury Inflation Protected Securities. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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When we invest in debt securities, we accept different types of risk: credit risk (the risk of default by the issuer of the debt), inflation risk (loss of purchasing power), liquidity risk and real or "true" interest rate risk (the risk that future interest rates will rise or fall over the life of the debt being held). This could reflect the market's belief that inflation risk has diminished, since one reason that investors require a term premium is to compensate for inflation risk. Instead, we believed that full employment was not inherently inflationary; in fact, we saw the greater inflation risk in stagnation itself. |
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