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.
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.
Get Answers For Free
Most questions answered within 1 hours.