Question

Related to the Solved Problem 4.3] According to an article in the Wall Street Journal in early 2016, "U.S. government bonds maturing in more than 25 years returned a negative 1.2% in the month through Thursday after chalking up a 8.7% gain between January and March.The reversal reflects a shift in financial markets' preoccupation from the prospect of a recession to the risk of higher inflation." Source: Min Zeng, "It Didn't Pay to Bet Against Inflation in April," Wall Street Journal, April 29, 2016 An increase in expected inflation will shift the demand curve equilibrium with a and the supply curve resulting in a new V price the nominal interest rate on both short-term and long-term bonds. The longer An increase in expected inflation will the maturity of a bond the ▼| the change in price as a result of a change in market interest rates. As a result, capital losses on long-term bonds will be V than capital losses on short-term bonds

Answer 1

Answer:

Increasing inflation expectations will change the demand curve to the left and the supply curve to the right, resulting in a fall in the price of the equilibrium. therefore new equilibrium occurs at a reduced price

Since Nominal rate of interest = Real interest rate + Inflation rate.

As a result, the rise in expected inflation will boost the nominal rate of interest on both quick-term and lengthy-term bonds.

The longer the bond maturity, the greater the volatility in price. The longer the maturity of the bond, the larger / bigger the price change as a result of market interest rate changes. As a result, long-term capital losses will be more than short-term capital losses.