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April 20, 2014

Homework Help: macro ec

Posted by Jennifer on Friday, March 2, 2007 at 1:26am.

does anyone know how rising inflation rates would effect the price of bonds?

Take a shot, and think it through. Hint: bonds typically have a fixed face value (e.g., $1000) and a fixed interest payment schedule (e.g., 6% of the face value per year), and a fixed maturity date (e.g., 10 years).

So, if there was zero inflation, how much would you pay for a bond that paid $60 per year for 10 years and $1000 at maturity? How much would you pay if you expected 3% inflation?

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