Investors purchase assets based on a rational expectation of a stream of future income. The interest rate is based on what investors would receive if they placed their capital in a risk-free investment, such as a government bond or certificate of deposit that is guaranteed by a government agency. However, each investor has a certain risk tolerance and may elect to incur some risk; this is known as a risk premium.…
Inflation rate is the percentage increase in the price of goods and services, usually annually.…
Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. For example, an investment that returns 2% before inflation in an environment of 3% inflation will actually produce a negative return (-1%) when adjusted for inflation. Another example would be a five-year bond with a principal value of $100. If the rate of inflation is 3% annually, the value of the principal adjusted for inflation will sink to about $84 over the five-year term of the bond. Inflation can be harmful to fixed-income returns in particular. Many investors buy fixed-income securities because they want a stable income stream, which comes in the form of interest, or coupon, payments. However, because the rate of interest, or coupon, on most fixed-income securities remains the same until maturity, the purchasing power of the interest payments declines as inflation rises. Inflation can adversely affect fixed-income investments in another way. When inflation rises, interest rates also tend to rise either due to market expectations of higher inflation or because the Federal Reserve has raised interest rates in an attempt to fight inflation. When interest rates rise, bond prices fall. Thus, inflation may lead to a fall in bond prices, potentially reducing…
Inflation, which is the rise of average level of prices, is an important part of macroeconomics. Price stability is one goal that is important in a market economy. Inflation can cause a lender to lose money if…
"Inflation" is defined as an increase in the overall level of prices over an extended period of time. Or in other words Inflation occurs when the supply of money far exceeds the supply of goods and services.…
The percentage of a portfolio’s total value invested in a particular asset is called that asset’s:…
You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset.…
When inflation is high, people increasingly fear that this will decrease their future purchasing power and their standard of living. Uncertainty about where prices of goods and services will be in the future makes it more difficult for people to make good economic decisions. That uncertainty is increased when prices are rising, since in these circumstances inflation is rarely stable and predictable. High inflation encourages approximate investments at the expense of more productive investments. It can also create the illusion of temporary financial well-being while hiding fundamental economic problems. When inflation is high, businesses and households spend more time and money trying to protect themselves from the effects of rising costs and prices. Business people, workers, and investors respond to rising inflation by pushing up prices, wages, and interest rates to protect themselves. This can lead to a "vicious circle" of rising inflation. Therefore inflation can be very difficult for those individuals whose incomes don't keep pace with rising prices, especially people on fixed incomes such as pensioners.…
is changing over time but we are not in a position to determine the nature of…
1. The risk-free rate of interest, in this case, the yield of the ten-year government bond, which is 6%.…
Inflation is the general rise in price of the products for the economy. The inflation rate in the UK is 2.7%, thinking about the economic climate the UK was in. if you look at the bigger picture the inflation rate has decreased in numbers compared to when it went up to 8%.…
Inflation is when a certain form of currency starts to have less value over time. Mainly two things cause it: people's perception of value, and the economic principle of supply and demand.…
In simple language, inflation is the rate at which prices increase annually. Essentially, prices go up due to two factors:…
As inflation increases, Reserve bank increases the interest rates to reduce the money supply and slow inflation down: When interest rates are high, people find it expensive to borrow, and therefore there is less money floating around. When interest rates are high; people require higher returns on stocks. Its not so easy to just increase earnings for a stock, so its price has to adjust downward.…
What inflation is? Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Subsequently, it will cause purchasing power fall. In simple terms, it means that too much of money is chasing for one particular item. When too much of money is available, the seller may raise the price of which he is willing to sell. In the long run, inflation has the potential of erasing the purchasing power of the people. It is because when the basic needs such as food and energy prices are on the rise, people simply need to fork out more just to maintain their standard of living.…