Inflation-Linked Bonds

Topics:
Equity,
Inflation
Tags:
Currency & Foreign Exchange,
Finance,
Inflation
Source:
The Financial Pipeline

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Overview: An inflation-linked bond is a bond that provides protection against inflation. Most inflation-linked bonds, the Canadian "Real Return Bond "(RRB) and the new U.S. Treasury inflation-protected security (IPS) are principal indexed. This means their principal is increased by the change in inflation over a period. In most countries, the Consumer Price Index (CPI) or its equivalent is used as an inflation proxy. As the principal amount increases with inflation, the interest rate is applied to this increased amount. This causes the interest payment to increase over time. At maturity, the principal is repaid at the inflated amount. In this fashion, an investor has complete inflation protection, as long as the investor's inflation rate equals the CPI. This deals with equities and inflation.

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