Question

the us inflation rate has been below the federal reserves 2 percent inflation target since 2012 meaning inflation has been low for the past decade. if investors anticpated that inflation were to increase in the future, what impact do you think would have on the price of Amazon corporations existing bonds( do you think the price of bonds would increase, decrease, stay the same)? why?

Answer 1

Inflation Vs Bond prices

There is an inverse relationship between interest rates and fixed-income asset prices. Inflation can have two negative impacts on bond investors. One is obvious, while the other is more subtle—and therefore, much more insidious. Inflation makes interest rates go up, in turn making bond values go down.

The first effect is that rising inflation can cause the U.S. Federal Reserve (the Fed)—or any country’s central bank, for that matter—to raise short-term interest rates to reduce the demand for credit and help prevent the economy from overheating.

When the Fed raises short-term rates—or when it is expected to do so in the future—intermediate and longer-term rates also tend to go up. Since bond prices and yields move in opposite directions, rising yields mean falling prices—and a lower principal value for your fixed-income investment.

Based on the above analysis, and as per the facts of the problem, the us inflation rate has been below the federal reserves 2 percent inflation target since 2012 meaning inflation has been low for the past decade. Therefore fed may continue the interest rates as long as the inflation rate is below the target of 2%.

But however customers are expecting to inflation rate May go up.Which means if US FED reserve increases the interest that may cause bonds to get lower priced.So in the given Problem Amazon Bonds value likely to go down or decrease.