NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
Which of the following best describes 'inflation risk' faced by an investor holding a fixed deposit?
Inflation risk is the chance that the real purchasing power of an investment's returns shrinks because the general price level rises faster than the interest or return earned. A fixed deposit paying less than inflation loses real value even without any default.
- AThe risk that the issuer fails to repay the principal
- BThe risk that the purchasing power of returns is eroded because prices rise faster than the interest earnedCorrect
- CThe risk that interest rates rise and the deposit's market price falls
- DThe risk that the deposit cannot be sold quickly without loss
Explanation
Inflation risk is the erosion of real purchasing power when inflation exceeds the nominal return. Option A describes credit risk, option C interest rate risk and option D liquidity risk.
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