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Basic Question 2 of 4
In an uncertain world, two factors complicate interest rates, namely ______.
B. opportunity cost and risk
C. inflation and risk
A. inflation premium and risk
B. opportunity cost and risk
C. inflation and risk
User Contributed Comments 12
| User | Comment |
|---|---|
| nimmala100 | uncertain means risky and ofcourse inflation is also aun certainity (percentage of inflation) |
| Nathan | Is it germane to require the distinction between "inflation premium" and "inflation," so that A is not also a good answer? ... The component of the interest rate is also referred to as the "inflation premium." |
| khanhpb | I was at first confused at inflation premium and inflation but 2 terms can be different because inflation here can be positive and negative, and normally it is risk that requires premium. Am i right? Please comment. thks |
| myzec | I think premium suggests 'extra' so an inflation premium would be the portion of the inflation that is above another benchmark. Like risk premium is the extra return you get for additional risk. Its not the full return just the extra to compensate for risk. So I would think inflation premium is not the same as inflation. |
| bobert | Think of it this way. If you were explaining to someone what the it is called when money is being devalued over time, you would not call it inflation premium. It would just be inflation. Conversely if you were taking all the parts of the interest rate you dont add inflation to it. I think the word premium is more-so an adjective in this sense. Inflation premium and inflation can be the same thing I suppose, but that is not always true. An inflation premium is additional value added to the interest rate. Inflation is what lowers the value of money. Hope this helps. |
| happy123 | When say inflation and risk complicate interest rate, is it saying that these two factors causing interest rate to change? |
| aliqatari | As we learn, the nominal interest rate can be calculated as simple as that: Real rate + Inflation rate. |
| eniben | I think inflation premium is what the lender will demand to cushion/counteract the effects of inflation. The risk premium likewise for the possibility that the borrower will default. |
| alester83 | the question is not explictly asking how an investor needs to be compensated, which is how you define the premium adjustments. the question is asking for factors. hope that helps clarify for you. |
| johntan1979 | Inflation premium is a RESULT of the inflation FACTOR |
| carsonson | So.... the interest FACTOR is affected by the inflation FACTOR, not premium |
| Stacerz02 | Uncertain isn't necessarily risky.... it could be good or bad... nothing is 100% certain, sort of like life. |
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Learning Outcome Statements
explain the notion that to affect market values, economic factors must affect one or more of the following: (1) default-free interest rates across maturities, (2) the timing and/or magnitude of expected cash flows, and (3) risk premiums;
explain the role of expectations and changes in expectations in market valuation;
CFA® 2025 Level II Curriculum, Volume 6, Module 37.