Compute the change in the price of the bond

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Reference no: EM13743400

A 10-year zero coupon $100 face value bond has yield of 6%. Through series of unfortunate circumstance, expected inflation rises from 2% to 3%.

(a) Assuming the nominal yield rises by an amount equal to the rise in expected inflation, compute the change in the price of the bond.

(b) Suppose that expected inflation is still 2%, but the probability that it will move to 3% has risen. Describe the consequences for the price of the bond.

Reference no: EM13743400

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