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Inflation On Buying Power Of A Dollar

Decent Essays
(1) Inflation can diminish the buying power of a dollar. When the yearly inflation rate surpasses the 'rate of return ', the market participants lose invested funds due to the deterioration of purchasing power. According to several financial articles, the significance of inflation on investment is subjective to the kind of securities held. A higher yield on a stock is not a safer expenditure; one most also take into consideration the risks involved. Interest rate risk can affect various bonds in different ways. A bond 's yield-to-maturity is the "discount rate" used to make the present value (PV) of all the bond 's cash flows equal to its price. When a bond 's yield rises, its price goes down, when a bond 's return decreases, its price goes up. For example, according to the article titled "How Interest Rate Changes Affect the Price of Bonds" it states, "the discount rate applied is the percentage of interest prevailing in the market for bonds of the similar risk and maturity." The long-term maturity period affects the predictability of its yield. A technique to adequately lessen security price volatility is to decrease maturities. Also, inflation consumes the buying capacity of a bond 's expectation. Moreover, T-bills do not present a risk-free return, since they are susceptible to economic expansion. During an economic recession, businesses take advantage of low-interest rates to fund new projects and purchase equipment. (2) A trade-off often shows the link
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