A $10-$year zero$-$coupon bond has a yield of $6$ percent. Through a series of unfortunate circumstances, expected inflation rises from $2$ percent to $3$ percent. The face value of the bond is $$100.$

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

Instructions: Enter your responses to the nearest penny $($two decimal places$).$

Price $($with $2\%$ expected inflation$)=$$

Price $($with $3\%$ expected inflation$)=$$

The price has $($Click to select$)$ by $

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

There is $($Click to select$)v$ inflation risk. Investors will require compensation for taking on additional risk, so the price will $($Click to select$)$ and the yield will $($Click to select$).$