Q. Which of the following statements correctly defines ‘Inflation Premium’?

[A] The bonus that borrowers receive from inflation because the real interest rate is lower than the nominal interest rate.

[B] A penalty paid by borrowers to the bank to compensate for the effects of inflation.

[C] The difference between the real profit and the nominal profit of a firm.

[D] The extra cost incurred by a lender to neutralise the effects of inflation.

Answer: A
Notes:

Explanation: The ‘Inflation Premium’ is described as the bonus brought by inflation to the borrowers. It is the difference between the nominal interest rate and the real interest rate, with the latter being lower during inflation, thus benefiting the borrower.

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