Question

person A can purchase an 8 percent coupon bond at face value, person A thinks that this is a relatively high rate of interest. The current rate of inflation is 6 percent, with an expectation to rise. What guidance could you provide to person A about their bond?

Answer 1

A decrease in Expected inflation raises the demand for bonds and Reduces their supply .as a result bond price increases and the interest rate decline.while an increase in Expected inflation falls the demand for bonds and Increase their supply.as a result bond price decreases and Interest rate increases.hence a should invest in the bond.this is not relatively high rate of interest because expected inflation will rise in the future hence it's better to invest.