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Index-Linked Bond

Candlefocus Editor

Index-linked bonds are an important tool for investors in search of protection from rising inflation. By linking an investment’s interest payments to the Consumer Price Index (CPI) or some other economic measure of inflation, these bonds can provide investors with a real return, allowing their investments to at least keep up with the rising cost of goods and services. They are even more valuable when inflation is rising quickly or when there is a risk of inflation exceeding expectations.

Unlike regular bonds, the nominal value of index-linked bonds remains the same over the course of the bond term. However, the value of the interest payments received goes up with inflation. In the US, these bonds are called Treasury Inflation Protected Securities (TIPS). It is also common for governments to pay an inflation-linked coupon for longer-term bonds, such as 10-20 year bonds.

Investors benefit from the fact that index-linked bonds are less volatile than normal bonds. The risk associated with uncertainty is greatly reduced, providing investors with the comfort that the underlying value of their investments won't fall in the face of inflationary pressures. In addition, the guaranteed principal amount allows the investor to be certain of the amount they will receive back at the end of the bond’s tenure, even if inflation rises.

Index-linked bonds are an attractive option for investors looking to protect their assets against rising inflation. The combination of stability and inflation protection that these bonds offer is hard to come by in other investments. For investors, these are essential instruments to have in their portfolios to ensure that their wealth maintains its value in the long-term.

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