How significant is the inflation premium on the shape of the term structure of interest rates?

Question

Multiple select question.

Less significant than the real rate of return

Very significant

Not significant

More significant than the real rate of return

Answer 1

To determine the significance of the inflation premium on the shape of the term structure of interest rates, it's important to understand how the inflation premium interacts with other factors, such as the real rate of return and expectations about future inflation.

Given that context, the appropriate selections might be:

• Very significant: The inflation premium can significantly affect the term structure because it influences the nominal interest rates across different maturities. Investors demand compensation for expected inflation, particularly for longer-term investments.

• More significant than the real rate of return: In some cases, particularly in environments with high inflation volatility or uncertainty, the inflation premium can be more significant than the real rate of return itself.

So, the most fitting options would be "Very significant" and "More significant than the real rate of return". However, this can vary depending on the economic context and prevailing interest rates.