FINRA Series 86 Research Analyst Practice Exam

Question: 1 / 400

What impact does inflation typically have on bond prices?

Bond prices usually rise during periods of high inflation

Bond prices usually fall during periods of high inflation

Inflation typically has a negative impact on bond prices because it erodes the purchasing power of fixed interest payments that bonds provide. When inflation rises, the real return on existing bonds diminishes, which makes them less attractive to investors. Consequently, to sell an existing bond that pays a fixed interest rate, the price must decrease to provide a yield that is competitive with new bonds issued at higher interest rates reflecting the increased inflation.

As inflation increases, new bonds are often issued at higher interest rates to attract investors, leading to a decrease in the price of existing bonds that pay lower rates. This relationship between bond prices and inflation underscores the broader economic principle that if inflation expectations rise, the value of current fixed-income securities, such as bonds, will generally fall, as investors demand higher yields to compensate for the decreased purchasing power over time.

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Bond prices remain unaffected by inflation

Bond prices increase with rising interest rates

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