If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause
A) the nominal coupon payment to rise.
B) the nominal coupon payment to fall.
C) the nominal coupon payment to remain unchanged.
D) the bond's price to fluctuate wildly.

Question

Quizplus · Accepted Answer

If a bond's coupon adjusts to pay a constant real rate of return, then an increase in inflation would cause the nominal coupon payment to rise. This is because the coupon rate is tied to the real rate of return, so as inflation increases, the nominal coupon must also increase to maintain the same real rate of return.

If a Bond's Coupon Adjusts to Pay a Constant Real