Question

If inflation were to increase in the near future, how would a large allocation to long term fixed income securities likely perform during that period?

		Inflation only affects prices thus it is not relatable to fixed income
		No measurable affect
		The holdings would generally increase in value with inflation, thus positive returns
		Potentially painful losses

Answer 1

Answer : Potentially painful losses

Most investors's goal is to increase their long-term purchasing power. Inflation will adversely affect this goal because investment returns will not be enough in future when there is increase in the purchasing power. Thus the inflation leads to potential losses to the investment.

Inflation is harmful to fixed-income returns. Because the rate of interest, on fixed-income securities remains the same until maturity, the changes in the purchasing power caused by the inflation leads to interest payments declines as inflation rises. When the interest rates increase the price of the fixed income investments decreases and vice versa.