(Part B)

The average maturity of outstanding U.S. treasury debt is a little more than 5 years. Suppose that a newly issued 5-year treasury note has a coupon rate of 2 percent and sells at par. What happens to the value of this bond if the inflation rate rises 1 percent point, causing the yield to maturity on the 5-year note to jump to 3 percent shortly after it is issued.

Part C:

Assume that "average" Treasury security outstanding has the features described in part B. If total U.S. debt is $16 trillion and an increase in inflation causes yields on Treasury securities to increase by 1 percentage point, by how much would the market value of the outstanding debt fall? What does that suggest about the incentives of government policy makers to pursue policies that could lead to higher inflation?

Answer rating: 100% (QA)

Part B The value of the bond would fall This is because the coupon rate is lower than the yield ... View the full answer