Question

The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.

Answer 1

D. Inflation

Step-by-step explanation:

According to a different source, these are the options that are included with this sentence:

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk

Inflation premium refers to the component of a return that compensates for inflation risk. This is the portion of the yield that compensates for the risk of decrease in the purchasing power of money. The yield on a bond can be estimates by using a risk-free rate, plus the addition of inflation premiums, default risks, and other similar premiums.

Answer 2

The answer is Inflation premium. Inflation Premium is a part of the interest rates that the result from the lenders compensation to the expected inflation by making the nominal interest rate to higher rates. It is also the investment returns that compensates for the expected increase of price levels of products.