Question

If inflation equals expected inflation, investors in government bonds will: A. suffer losses regardless of inflation...

If inflation equals expected inflation, investors in government bonds will:

A. suffer losses regardless of inflation because interest paid on government bonds is set by Congress. B. not suffer losses because inflation does not affect the purchasing power. C. suffer losses because they will be compensated by lower interest payments. D. not suffer losses because they will be compensated by higher interest payments.

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Answer #1

If inflation equals expected inflation, investors in govt bonds will:

B. not suffer losses because inflation does not affect the purchasing power.

Govt bonds are valued after keeping in mind the expected inflation, and if the inflation increases more than that bond holder is compensated for the losses and vice versa for decrease in inflation. But when inflation remains on the expected lines the interest from bonds will cover the inflation and the purchasing power will remain same. Thus the bond holder will not incur any loss and his purchasing power will remain intact.

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