NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
Which of the following best describes inflation risk for an investor holding a fixed deposit?
Inflation risk is the chance that the real purchasing power of returns declines because prices rise faster than expected. A fixed deposit paying a fixed nominal rate may yield little or negative real return, unlike credit, interest rate or liquidity risks, which concern other issues.
- AThe chance the bank defaults on payment
- BThe chance that real purchasing power of returns falls because prices rise faster than expectedCorrect
- CThe chance that interest rates rise after investing
- DThe chance that the deposit cannot be sold quickly
Explanation
Inflation risk is the erosion of purchasing power when inflation outpaces nominal returns. Default is credit risk, rising rates is interest rate (reinvestment) risk, and inability to sell quickly is liquidity risk.
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