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PLEASE ANSWER IN 150-200 WORDS THANK YOU. 1. How can investors guide against an inflationary economy...

PLEASE ANSWER IN 150-200 WORDS THANK YOU.

1. How can investors guide against an inflationary economy that may erode the value of their investments?

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Answer #1

Inflation is a sustained trend increasing prices. Inflation erodes the value of an investment. Investors can protect the value of their investment by investing in inflation protector securities such as Treasury inflation protected securities and inflation index bonds. Investors who invested in fixed income securities would be the most affected due to inflation. This is because the real returns from the investment decline due to inflation. TIPS are investment in which the principal and coupon payments are related to the CPI and increased to compensate for inflation factors. Such an investment guarantees the real returns on the investment and keeps the principal safe from fluctuations. The returns from investment are also modified so as to reflect the impact of inflation.

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