Inflation Risk Statement

Price-Level Risk Statement

When inflation is greater than expected, then the real value of the nominal-loan payment will be less than expected, making the borrower better off and the lender worse off. On the other hand, when inflation is less than expected, then the real value of the nominal loan payment will be greater than expected, making the borrower worse off and the lender better off. A priori, both the borrower and lender, being risk averse, would be better off without this inflation risk.

When price level is greater than expected, then the real value of the nominal-loan payment will be less than expected, making the borrower better off and the lender worse off. On the other hand, when price level is less than expected, then the real value of the nominal loan payment will be greater than expected, making the borrower worse off and the lender better off. A priori, both the borrower and lender, being risk averse, would be better off without this price-evel risk.