9. B is correct. Short-term default-free interest rates tend to be very heavily influenced by the
inflation environment and inflation expectations over time. The greater uncertainty about the
real value of the bond’s payoff will cause investors to demand a premium in compensation
for this uncertainty and will cause the discrepancy in bond pricing. The break-even inflation
rate incorporates both premiums for expectations about inflation and for the uncertainty of
the future inflation environment. Section 4.1-4.4. LO.e.
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