B. The current rate of inflation is 3 percent, and long-term Treasury bonds are yielding 7 percent. You estimate that the rate of inflation will increase to 6 percent.

i. What do you expect to happen to long-term bond yields?

ii. Compute the effect of this estimated change in inflation on the price of a 15-year, 10 percent coupon bond with a current yield to maturity of 8 percent.