Final answer:
An increase in inflation will have a larger impact on the price of bonds compared to preferred stock.
Step-by-step explanation:
An increase in inflation will have a larger impact on the price of bonds compared to preferred stock.
When inflation rises, interest rates also tend to rise. In the case of bonds, their value is inversely related to interest rates. As interest rates increase, the price of existing bonds decreases because investors can get higher returns from newly issued bonds with higher interest rates. On the other hand, preferred stock is a type of equity investment that generally pays a fixed dividend. Changes in inflation and interest rates typically have less impact on preferred stock compared to bonds.
For example, if inflation increases and interest rates rise from 3% to 5%, the price of existing bonds with a 3% coupon will decrease to compensate for the lower yield compared to the newly issued bonds with a 5% coupon.