The price of bonds will fall from P1 to P2 when:

Question

BlackTom AI · Accepted Answer

Higher expected inflation reduces the real return investors receive on a fixed‑coupon bond, so they demand a higher nominal yield; because bond prices are the present value of fixed payments discounted at the market yield, an increase in the required yield (driven by higher expected inflation) causes the bond price to fall from P1 to P2.

Relevant concepts:
- Bond price and yield move inversely: P = Σ(CF_t / (1 + r)^t). If r (required yield) rises, P falls.
- Inflation expectations raise nominal yields because investors require compensation for expected loss of purchasing power (Fisher relation: nominal rate ≈ real rate + expected inflation).
- A higher required yield is a fundamental cause of lower bond prices.

Step-by-step reasoning with a simple numeric example (one‑period bond):
1. Suppose a one‑year bond pays coupon + principal = total cash flow = 1,050.
2. If the required yield r1 = 5%, price P1 = 1,050 / (1 + 0.05) = 1,050 / 1.05 = 1,000.
3. If expected inflation rises and investors now require r2 = 6%, price P2 = 1,050 / (1 + 0.06) = 1,050 / 1.06 ≈ 990.57.
4. P2 < P1, so the bond price falls as expected inflation (and thus required yield) increases.

Why the correct answer is c:
- Rising expected inflation leads investors to demand higher nominal yields to preserve real returns; higher yields directly reduce bond prices from P1 to P2.

Why other choices are incorrect:
- a (bond risk is expected to fall): Lower perceived risk decreases required yield and raises bond prices (P would rise, not fall).
- b (bond returns are expected to rise): This is ambiguous and backward causation—expected higher returns on bonds typically result from yields rising (which is driven by factors like inflation); the clear direct driver of a price decline is higher required yields due to inflation expectations, not the vague statement that returns will rise.
- d (interest rates are expected to fall): Falling interest rates lower required yields and therefore increase bond prices (opposite effect).

Conclusion: Higher expected inflation increases required nominal yields and therefore lowers bond prices, so the correct choice is c.

The price of bonds will fall from P1 to P2 when:单项选择题

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