Question

27) Consider the following statements:

i) Inflation benefits the debtors.

ii) Inflation benefits the bondholders.

Which of the statements given above is/are correct?

• A. a) i, only
• B. b) ii only
• C. c) Both i and iii
• D. d) Neither i nor ii

Answer 1

The correct option is A

a) i, only

Ans: A
Explanation: If the borrower already owed the money before the inflation occurred, the inflation benefits the borrower. This is because the borrower still owes the same amount of money, but now he or she has more money in his or her pay check to pay off the debt This results in less interest for the lender if the borrower uses the extra money to pay his or her debt.

The twin factors that affect a bond's price are inflation and changing interest rates. A rise in either interest rates or the inflation rate will tend to cause bond prices to drop.