Which one of the following is most likely to experience loss of wealth from an unanticipated increase in the inflation rate? A) An individual investor who recently purchased a substantial amount of variable rate bonds. B) A commercial bank that has a large quantity of fixed-rate mortgages in its loan portfolio. C) An individual investor who financed the purchase of a home with a 30-year fixed rate mortgage.
b-sure
Nominal Interest rate = Real risk free rate + Expected Inflation. Increase in inflation will up the current nominal risk free rate. Hence the commercial bank that has a large number of fixed rate mortgages are suffering.
Have to agree, it has got to be B
B yes. Lenders prefer low inflation. High inflation means that borrowers can repay loans with less valuable or “less dear” dollars.
in banks common practice is to borrow short term and lend long term ,increasing of inflations means renewal of the borrowed funds at higher rates and thus squeezing the margin