Fixed coupon rates cause bond yields to lag inflation rates when inflation rates begin to increase significantly.

Question

Quizplus · Accepted Answer

When inflation rates begin to increase significantly, the purchasing power of a fixed coupon rate decreases, causing bond yields to lag behind inflation rates. This means that investors are receiving a lower real return on their investment, as the bond's nominal rate of return remains the same while inflation erodes its value.

Fixed Coupon Rates Cause Bond Yields to Lag Inflation Rates