Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
What is the value of this bond?
Now suppose the bond has no coupon payments but still pays $1000 in ten years. What is the value of this bond?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
