In September 2012 A Wall Street Journal offered the following opinion of the bond market, when inflation rate was about 2%: "Someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the losing end of the bet".
1. Discuss verbally and demonstrate graphically what will happen to the price of bonds if expected inflation increases to 4% from 2%. Be sure to include in your answer the demand the bond market.
2. Describe why someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the losing end of the bet.
3. Assume that you expect a greater increase in inflation than do others investors, but that you do not expect the increase to occur until 2015. Should you wait until 2015 to sell your bond? Briefly explain.
4. The columnist also argued that long-term bonds would be a good investment if only "when we get serious price deflation" .