The old lady was arguing with her grandson, who happened to like finance and accounting very much. The argument went about these lines: the grandson said that the increases in rates made by the FED beginning in 2015 really damaged the retirement accounts based on bonds by lowering their market value. To that statement, the old lady replied that she agreed but he ought to remember the asymmetry of bond prices with respect to increases and decreases in rates. Faced with that opinion, the grandson drew a blank and decided to tackle inflation instead. He stated that a very possible decrease in inflation would be very damaging to the high coupon bonds because their price changes the most. To this, the old lady replied he was wrong; the effect would be the complete opposite to what he said if inflation decreased.

Now, the questions for you related to this story:

a - Was the grandson right when he stated that bond portfolios lost value because of the increases in rate? What would be the mechanism for the loss of value?

b - What does the old lady means by the asymmetry of bond prices with respect to increases and decreases in rates?

c - How would these asymmetries, if they exist, have anything to do with the value of the bond portfolios?

d - Who was right about the effect of inflation on bonds? Explain why.