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.