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Basics (Saving and Investing) Intermediate: Effects of Inflation on Investments

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1.
Which of the following is not an effective hedge against inflation?
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Fixed-rate bonds. These are not an effective hedge against inflation. When inflation rises, the nominal rate of return on fixed-rate bonds stays the same. This means that the real rate of return on fixed-rate bonds decreases.
2.
An annuity or bond whose interest rate is linked to the Consumer Price Index is considered a perfect hedge against inflation.
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True. Interest rates that are linked to the Consumer Price Index will increase at a proportional rate to inflation, making index-linked investments a perfect hedge.
3.
Real returns on stocks tend to decrease when inflation increases.
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True. Evidence has shown that inflation causes a decrease in the real return on stock investments.
4.
To measure your gain on an investment in terms of purchasing power, you should look at its _______.
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Real interest rate. The real rate measures the return on your investments after subtracting out inflation.
5.
One measure of inflation in the United States is the Consumer Price Index.
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True. The Consumer Price Index measures inflation.
Introduction to Effects of Inflation on Investments What Is Inflation? The Effect of Inflation on Fixed-Income Investments The Effect of Inflation on Stocks Hedging against Inflation Summary of Effects of Inflation on Investments Find out what you learned