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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape

Which of the following best describes inflation risk for an investor holding a fixed deposit that pays a constant interest rate?

Inflation risk is the risk that rising prices reduce the purchasing power of the money an investor receives, including interest and principal. A fixed return that does not keep pace with inflation yields a low or negative real return, unlike credit or liquidity risk.

  1. AThe risk that the issuer fails to repay the principal
  2. BThe risk that rising prices reduce the purchasing power of the interest and principal receivedCorrect
  3. CThe risk that the interest rate on reinvestment of maturity proceeds will be higher
  4. DThe risk that the investment cannot be sold quickly without loss

Explanation

Inflation risk arises when the general price level rises faster than the investment's returns, eroding real purchasing power. Option A describes credit risk, option C is not a risk of loss in this form, and option D describes liquidity risk.

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