1. Macintosh & Cuttner Corporation issues a 20-year bond with a fixed coupon rate of 5%. Suppose, that the inflation rate over the period is 11%. In 20 years, Macintosh & Cuttnerin ___________________________ (Options: In real term will benefit/ In real terms will suffer/ In real terms will be financially unaffected) BECAUSE:

A. Inflation increases the real value of the coupon payments, whereas the value of the principle does not change

B. Inflation decreases the real value of the coupon payments and the principle

C. Inflation decreases the real value of the coupon payments by the same amount as it increases the value of the principal payment

D. Inflation increases the real value of the principle, whereas the value of the coupon payments does not change

2. Ceteris paribus, which of the following follows from the situation described in the previous question?

A. Generally, borrowers benefit from the fact that neither the coupon rate on a bond nor the face value of a bond changes over the life of the bond.

B. Both borrowers and lenders are better off because the coupon rate on a bond and the face value of a bond does not change.

C. Both borrowers and lenders are worse off because the coupon rate on a bond and the face value of a bond does not change.

D. Generally, the lenders benefit from the fact that neither the coupon rate on a bond nor the face value of a bond changes over the life of the bond.