A 10-year zero-coupon bond has a yield of 6 percent. Through a series of unfortunate circumstances, expected inflation rises from 2 percent to 3 percent.
a. Assuming the nominal yield rises in an amount equal to the rise in expected inflation, compute the change in the price of the bond.
b. Suppose that expected inflation is still 2 percent, but the probability that it will move to 3 percent has risen. Describe the consequences for the price of the bond.