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1、7INFLATION-PROTECTEDBONDSAllbondsprotecttheinvestorfrominflation.Thedifferencebetweeninflation-protectedbondsandordinarybondsisthattheformerpro-videprotectionfromunexpectedinflationwhereasthelatterdonot.Thischapteropenswithanexplanationofthefirstsentenceabove
2、.Therestofthechapterexplainsthesecondsentence.RealversusNominalInterestRatesInflationmeansanoverallincreaseinthepricelevel.Particulargoodsandservicescanriseinpricebecausetheybecomescarcerormoreexpensivetoproducethanothers.Thisdoesnotmeanthattheirpriceshave
3、becomeinflated.Thatwouldbeconsideredarealpricechange,sincetheirpriceshaveincreasedrelativetoothergoodsandservices.Whenallgoodsandservicesincreaseinprice,that’sinflation.1Supposeyou’reconsideringlending$100forayear.Youexpectinflationtobe2%betweennowandtheendo
4、ftheyear.Whenthebor-rowerreturns$102toyou,you’rejustbreakingeven—whateveryoucouldhavepurchasedforyour$100nowisexpectedtocost$102attheendoftheyear.Soyou’llbeearningnothingonyourloan—you’renobetteroff.Putanotherway,you’rereallyearning0%.Infinancialterminolog
5、y,thestated,or“nominal,”interestrateonyourloanis2%,butthe“real”interestrateis0%percent.Inordertoactuallygetareturnonyourmoney,youneedanominalinterestrategreaterthan2%.8586•Inflation,YieldCurve,andCreditFactorsinBondsAnotherwaytosaythisisthattheborrowermust
6、payyou2%abovetherealinterestrate.Nowthinkaboutthemarketasawhole.Investorshavedifferentexpectationsregardingfutureinflation—somemore,someless,than2%.Butthereisonlyoneinterestratestatedonabond.Wearrive,therefore,atthefollowingconclusion.Whateverrealreturninv
7、estorsdemandforaparticularmaturityloanorbond,thenominalinterestrateforthatmaturitymustequalthatreturnplusanextraamountfortheinflationrateexpectedbyinvestorsasagroupoverthatperiod.Inshort:Thenominalinterestrateforanymaturityequalstherealinterestrateplusthem
8、arket’sexpectedrateofinflationforthatperiod.RealversusNominalRateofReturnSupposethat,basedonanexpectedinflationrateof2%,theinterestrateonaone-yearloanis5%,fora“real”rateof3%.Oncetheyearisoverandtheloanrepaidwithintere
