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 that pays a fixed rate of interest?
Inflation risk is the risk that rising prices reduce the purchasing power of an investor's returns and principal. A fixed-rate deposit is exposed because its nominal return may not keep up with inflation, so the real return can become low or negative.
- AThe risk that the issuer will fail to repay the principal
- BThe risk that the purchasing power of the returns and principal falls because prices riseCorrect
- CThe risk that the investment cannot be sold quickly without loss
- DThe risk that interest rates fall when the deposit is renewed
Explanation
Inflation risk is the erosion of real purchasing power when price rises outpace the return earned. Failure to repay is credit risk, difficulty in selling is liquidity risk, and falling rates at renewal is reinvestment risk.
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