BANKING AFFAIRS

Detailed explanation-1: -Inflationary risk (also called inflation risk or purchasing power risk) is a way to describe the risk that inflation can pose to a portfolio over time. Specifically, it refers to the possibility that rising prices associated with inflation could outpace the returns delivered by your investments.

Detailed explanation-2: -Effect of inflation on fixed income investments However, since the rate of interest remains the same on most fixed income securities until maturity, the purchasing power of the interest payments declines as inflation rises. As a result, bond prices tend to fall when inflation is increasing.

Detailed explanation-3: -HOW DOES INFLATION AFFECT INVESTMENT RETURNS? Inflation poses a “stealth” threat to investors because it chips away at real savings and investment returns. Most investors aim to increase their long-term purchasing power.

Detailed explanation-4: -Inflationary risk is the risk that inflation will undermine an investment’s returns through a decline in purchasing power. Bond payments are most at inflationary risk because their payouts are generally based on fixed interest rates, meaning an increase in inflation diminishes their purchasing power.