What Is an Inflation Premium?
Inflation premium is a kind of compensation for investment losses caused by the devaluation of inflation. Such compensation includes both the compensation for the devaluation of the original investment and the depreciation of the income derived from the investment. [1]
Inflation premium
Right!
- Inflation premium is a kind of compensation for investment losses caused by the devaluation of inflation. Such compensation includes both the compensation for the devaluation of the original investment and the depreciation of the income derived from the investment. [1]
- The expected inflation rate is not necessarily equal to the current inflation rate. E.g,
- The sum of the risk-free real interest rate and the inflation rate is called the "risk-free nominal interest rate" and is referred to as the "risk-free interest rate" for short.
- Risk-free (nominal) interest rate = risk-free real interest rate + inflation premium
- Generally, when people say "risk-free interest rate", if there is no "true" attributive, it means "risk-free nominal interest rate". This habit is formed because the real interest rates that people can observe include inflation premiums. The frequently used "risk-free interest rate" usually refers to the risk-free nominal interest rate, which includes the inflation premium. For interest rates that exclude risks and inflation, they should be called "risk-free real interest rates", referred to as "real interest rates" or "pure interest rates." [2]