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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Inflation and Bonds

Inflation and Bonds

Inflation is the friend of the bond issuer and the enemy of the bond holder. Consider an example. JBI (Jelly Bean Inc.) issues $10 MM of bonds in 2012 at an 8% coupon. We then have rolling inflation. A carton of milk which costs $3 in 2012 by 2016 costs $6. An average wage earner who used to earn $65,000 now earns $130,000. Basically inflation has caused all prices to double. As a result, it is very easy for JBI to make the interest payments on their bonds because money has lost value. Conversely, the guy who got 8% from the bond lagged inflation dramatically.

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