Question

Due to recent political and economic events, general prices of goods and services are expected to increase significantly over the next five years. You were about to purchase a five-year bond. You now require a higher return on the bond than you did before you found out about these expected price increases. Determine which of these fundamental factors is affecting the cost of money in the scenario described:

Answer 1

The options are missing, so I looked for similar questions.

the missing options are:

• inflation
• time preferences
• risk

the correct answer is inflation.

When investors purchase bonds, they are worried about the real interest rate that they will receive = nominal interest rate - inflation rate.

Sine the inflation rate is increasing, then the nominal rate must also increase in order to keep the real interest rate stable.

Step-by-step explanation: