Prior to beginning work on this assignment, read Hubbard and OBriens (2017) Chapters 3 and 4. Choice Financial is a financial services firm based in San Diego, California. In early 2018, Tom Jones, a financial analyst for the firm, predicted that the inflation rate would go up from 1.5% in 2018 to 6% in 2020. He advised investors not to buy bonds because their prices would fall as inflation increased.
Explain why bond prices fall when inflation increases.
Analyze the relationship between the price of bonds and interest rates.
Appraise how interest rates are determined using the following models and whether the different models produce different results in determination of interest rates:
Demand and Supply
Evaluate how each of the following affects interest rates and the price of bonds:
Yield to Maturity