Georgie is a finance and economics student who has inherited $50,000. Which of the following securities would be the most attractive investment for her if she is expecting inflation rates to increase?
a. 2-year government bonds (zero coupon).
b. 2-year government bonds (2% coupon rate).
c. 5-year government bonds (2% coupon rate).
d. 5-year government bonds (zero coupon).
As Inflation rate rises so the interest rate on the bond will also increase in future. So for that reason it is economical to buy short term bond as new high interest bond can be bought in future with increase in inflation. Coupon paying bond is favourable in environment where inflation rate will increase as you will get money slowly with coupon. The coupon money will help you to utilize the money now, rather than in high inflation environment when the value of money will be less.
So the correct option is "B"
If you find the solution helpful, then please give rating.
Get Answers For Free
Most questions answered within 1 hours.