Question

1. why does hyperinflation generate such significant economic disfunction? What is a hyperinflation?

2. How does the “return” on a bond differ from its coupon rate?

3. Explain why bond prices and interest rates are inversely related.

Answer 1

Ans

1 Because people loose faith on money and start hoarding. Investors confidence is shaken. Nobody wants to give loans as repayment is of no use

hyperinflation is a situation where inflation is very high high and accelerating so that money losses its real value quickly.

2 return considers both cost and returns of a bond

3 Because as new bonds are introduced they may have higher prices. Hence old bonds must have lower interest rate so that they are perfect substitutes.