inflation premium

Inflation Premium

The higher return that investors demand in exchange for investing in a long-term security where inflation has a greater potential to reduce the real return. The inflation premium is the reason that most yield curves trend upward. Thus, a bond with a maturity of 30 years almost always has a higher coupon rate than one with a maturity of 30 days. Investors expect to make a larger nominal return in part to compensate them for the lower real return that is almost inevitable because of the nature of inflation. See also: inflation risk.

inflation premium

The portion of an investment's return that compensates for expected increases in the general price level of goods and services. The expectation of rising inflation results in higher long-term interest rates as lenders and borrowers build in an increased inflation premium.
Mentioned in ?
References in periodicals archive ?
To the extent that small firms operate in more competitive environments, they may have less pricing power than larger firms, and hence may be more exposed to inflation risk, and hence command an inflation premium relative to larger firms.
Nevertheless, the scope for steepening seems limited given the MENA tensions and the associated short-term risk and inflation premium.
In exchange for extending more loans to a federal government that has become a riskier borrower, lenders will ask for an inflation premium.
What has mostly flowed is the supply of dollars, and so some part of oil's increase should be called the Alan Greenspan-Ben Bernanke inflation premium.
Variants of the low inflation premium story appear in:
The average inflation premium is negative, as one would expect given the negative impact of inflation on the mean of asset returns.
A positive correlation biases the spread between nominal and indexed securities--a measure of the inflation premium investors demand--toward zero, reducing its informativeness.
The Treasury also is considering other options for these bonds: One would be a zero-coupon bond, in which a person gets all his money back at the end of the bond's life along with an inflation premium.
The Fed is expected to accommodate a positive monetary surprise, at least in part, by increasing money supply growth thus raising the inflation premium in nominal interest rates.
But the more credible the central bank's commitment to price stability, the less likely it is that an inflation premium will be built into market interest rates, and the less likely it is that rising inflation expectations will distort economic decisions.