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    considering interest rates and inflation effects on bonds

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    1. An investment offers a 13 percent total return over the coming year. Jim Kelly thinks the total real return on this investment will be only 7 percent. What does Jim believe the inflation rate will be over the next year?

    Interpreting Bond Yields
    Suppose you buy a 7 percent coupon, 20 year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

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    Solution Preview

    1. Jim believes the inflation will be 6%. If inflation is at 6%, it means that prices are rising at a rate of 6% so your dollar is losing value unless investment returns are greater than 6%. So the first 6% of returns on this bond is ...

    Solution Summary

    This solution describes, with examples, the effects of the return on a bond when taking interest rates and inflation into consideration.

    $2.19

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