An instrument which is used to link the cash flows from a bond to an inflation index. In this bond, the coupon rate is specified in real terms by making interest payments equal to the coupon rate multiplied by the inflation-adjusted principal amount. At maturity, the principal repayment is equal to the nominal value of the bond multiplied by the cumulative change in the inflation index.

In other words, this bond pays a fixed real coupon rate and an inflation-indexed nominal principal. Periodic coupon is calculated as follows:

Periodic coupon = real coupon rate x inflation-adjusted principal