Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question

 How does the inflation premium shape the yield curve? 

 

Expert Solution
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Step 1: the inflation premium

The inflation premium is one of the components that shape the yield curve. It reflects the additional return that investors require to compensate for the erosion of their purchasing power due to expected inflation over the life of a fixed-income security. In other words, it's the extra yield that investors demand to ensure that their investment will maintain its real (inflation-adjusted) value.

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