Introduction
The finance assignment help here clarifies that the nominal interest rates are computed with reference to the real interest rate and inflation, thus, the inflation affects the nominal interest rates. Understanding the relationship between the inflation and the interest rates is important for the investor. The investors are always concerned with the rate of inflation as it affects the effective return on the investment. The analysis of the views of the experts providing help with finance assignment infers that the higher the rate of inflation, higher turns out to be return expectations of the investors.
Inflation and Interest
A review of essay writing service available online reveals that the relationship between the rate of inflation and nominal interest rate is direct. This means that when the rate of inflation increases, the nominal interest rate also increases and vice a versa. Thus, it is important for the investor to consider the expectations about the inflation rate when taking the investment decision. If the investor expects that the inflation rate will increase in future, the expected required rate of return of the investor also gets increased. For example, an investor is getting a 10% return on the investments as of now, the future expectations for an increase in the rate of inflation are 2%. Now the investor will require a return of 12% from the investments rather than the existing return of 10%. The 2% rise in the rate of interest will cause devaluation in the purchasing power of the currency and thus, the effective rate of return will also be reduced to that extent.
The finance assignment help here clarifies that the nominal interest rates are computed with reference to the real interest rate and inflation, thus, the inflation affects the nominal interest rates. Understanding the relationship between the inflation and the interest rates is important for the investor. The investors are always concerned with the rate of inflation as it affects the effective return on the investment. The analysis of the views of the experts providing help with finance assignment infers that the higher the rate of inflation, higher turns out to be return expectations of the investors.
Inflation and Interest
A review of essay writing service available online reveals that the relationship between the rate of inflation and nominal interest rate is direct. This means that when the rate of inflation increases, the nominal interest rate also increases and vice a versa. Thus, it is important for the investor to consider the expectations about the inflation rate when taking the investment decision. If the investor expects that the inflation rate will increase in future, the expected required rate of return of the investor also gets increased. For example, an investor is getting a 10% return on the investments as of now, the future expectations for an increase in the rate of inflation are 2%. Now the investor will require a return of 12% from the investments rather than the existing return of 10%. The 2% rise in the rate of interest will cause devaluation in the purchasing power of the currency and thus, the effective rate of return will also be reduced to that extent.
Inflation Hedge
Financial accounting assignment help reveals that the Inflation hedge refers to the mechanism employed to protect the return on investment from being reduced due to rise in the rate of inflation in the future. As discussed earlier, the rise in the rate of inflation causes reduction in the effective return from the investments. Thus, it is customary for the investor to guard against the loss that may be caused due to rise in the rate of inflation. There are financial instruments available, the investment in, which provides safeguards against the risk of a rise in the rate of inflation. The US Treasury issues inflation adjusted bonds, which promises to pay the investor an interest over and above the normal interest to cover the loss that may be caused due to rise in the inflation rate. Further, there are other short term securities known as Treasury Inflation Protected Securities, which are used to guard against the inflation risk.
Corporate finance homework help experts state that a part of the interest payments on the inflation adjusted bonds is kept fixed with the promise to pay variable interest on account of rise in the inflation. For example, consider an issue of 10 year inflation adjusted bond with a 1.6% fixed interest. Now assume that after one year the rate of inflation rises by 2%. In this case, the bond will pay interest to the investors at the rate of 1.6% and an extra interest at the rate of 2% for the rise in the inflation rate. Thus, the investor is adequately safeguarded against the risk of a rise in the inflation.
Summary
The inflation rate is a major concern for the investors as it reduces the purchasing power of the money and thereby affects the realized rate of return on the investment. The financial accounting assignment help provided through this paper addresses this issue in a great detail along with the measures that can be taken to hedge against the risk of inflation. Among the various measures available to guard against the risk of inflation, the primary are the inflation adjusted bonds and Treasury Inflation Protected Securities. Thus, this paper contains essential information from the view point of the students seeking essay help on the inflation risk.
Financial accounting assignment help reveals that the Inflation hedge refers to the mechanism employed to protect the return on investment from being reduced due to rise in the rate of inflation in the future. As discussed earlier, the rise in the rate of inflation causes reduction in the effective return from the investments. Thus, it is customary for the investor to guard against the loss that may be caused due to rise in the rate of inflation. There are financial instruments available, the investment in, which provides safeguards against the risk of a rise in the rate of inflation. The US Treasury issues inflation adjusted bonds, which promises to pay the investor an interest over and above the normal interest to cover the loss that may be caused due to rise in the inflation rate. Further, there are other short term securities known as Treasury Inflation Protected Securities, which are used to guard against the inflation risk.
Corporate finance homework help experts state that a part of the interest payments on the inflation adjusted bonds is kept fixed with the promise to pay variable interest on account of rise in the inflation. For example, consider an issue of 10 year inflation adjusted bond with a 1.6% fixed interest. Now assume that after one year the rate of inflation rises by 2%. In this case, the bond will pay interest to the investors at the rate of 1.6% and an extra interest at the rate of 2% for the rise in the inflation rate. Thus, the investor is adequately safeguarded against the risk of a rise in the inflation.
Summary
The inflation rate is a major concern for the investors as it reduces the purchasing power of the money and thereby affects the realized rate of return on the investment. The financial accounting assignment help provided through this paper addresses this issue in a great detail along with the measures that can be taken to hedge against the risk of inflation. Among the various measures available to guard against the risk of inflation, the primary are the inflation adjusted bonds and Treasury Inflation Protected Securities. Thus, this paper contains essential information from the view point of the students seeking essay help on the inflation risk.