Question

When inflation increases, the market value of outstanding fixed income securities will MOST likely:(A)Increase(B)Decrease(C)Remain the same(D)Become very volatile

Answer 1

Answer:

(B)Decrease

Explanation:

Interest rate is inversely related to the market value of fixed interest income securities like bonds, certificate of deposits, preferred stocks e.t.c.

The higher the inflation, the higher the interest rates all things being equal. An increase in interest rate will drive down the market value of fixed income securities because inflation reduces the real returns on fixed income securities.