Other things being equal, a rise in the price level will imply _ in wealth for the bondholder but in the wealth of the issuer of the bond.
A)an increase; an increase
B)a decline; no change
C)a decline; an increase
D)an increase; a decline
E)a decline; a decline

Question

Quizplus · Accepted Answer

A rise in the price level will lead to a decrease in the purchasing power of money. As a result, the real value of the bond's coupon payments decreases, reducing the wealth of the bondholder. Conversely, the issuer's wealth increases because they are paying back the bond using dollars that are worth less. Therefore, the bondholder experiences a decrease in wealth, while the issuer experiences an increase in wealth.

Other Things Being Equal, a Rise in the Price Level