Index-Linked Bond

An index-linked bond is a type of debt security where the interest payments and/or the principal amount are adjusted based on changes in a specified index, typically an inflation index like the Consumer Price Index (CPI). These bonds are designed to protect investors from inflation by ensuring that the returns are adjusted to maintain purchasing power. Governments and corporations issue index-linked bonds to attract investors seeking inflation protection while offering stable income.

Example

A U.S. Treasury Inflation-Protected Security (TIPS) is an example of an index-linked bond, where the bond’s principal increases with inflation, and interest payments are adjusted accordingly.

Key points

• Debt security with interest payments or principal linked to an index, usually inflation.

• Protects investors from inflation by adjusting returns to maintain purchasing power.

• Commonly issued by governments and corporations to attract inflation-conscious investors.

Quick Answers to Curious Questions

What is the purpose of index-linked bonds?

Index-linked bonds protect investors from inflation by adjusting interest payments and principal to keep pace with rising prices.

How are index-linked bonds different from traditional bonds?

Unlike traditional bonds, which offer fixed interest payments, index-linked bonds adjust their returns based on changes in an inflation index, protecting against purchasing power erosion.

Who should invest in index-linked bonds?

Investors concerned about inflation eroding the value of their fixed-income investments may benefit from index-linked bonds, which offer protection against rising prices.