| Consider the following statements. |
| 1. Inflation benefits the debtors. |
| 2. Inflation benefits the bond-holders. |
| Which of the statements given above is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) Neither 1 nor 2
Correct Answer: A
Solution :
Exp. [a] Statement 1 is correct. This is because due to inflation, the value of money goes down. The money owed by debtors, which borrowed in the past and due to inflation, its real value goes down and it thus, becomes easier to pay due to lower real interest rates. The bond yields however go down due to inflation. The inflation eats into the bond payback. So, Statement 2 is incorrect.
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