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Suppose you have a bond with a yield to maturity of 5% and a duration of...

Suppose you have a bond with a yield to maturity of 5% and a duration of four years. Suddenly inflation erupts. How would this effect duration? Explain.

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Answer #1

At the time of inflation, the bond price will fall. Bond price and Yield to maturity (YTM) is inversaly related. If the bond price decrease, then the yield to maturity will increase. Thus, at the time of inflation, the yield to maturity will increase. The yield to maturity of the bond and duration of the bond are also inversaly related. If the yield to maturity increases, then the duration will decreases. If the yield to maturity decrease, then the duration will increase. At the time of inflation, the yield to maturity will increase, but the duration of the bond will decrease.

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