A bond whose cash flows are linked to movements in a given price index such as a consumer price index (CPI), wholesale price index, average earnings, GDP deflator, etc. This bond provides investors with a tool to protect the real value of their savings/investments by accounting for the erosion of purchasing power usually caused by inflation. Likewise, it allows issuers to know for some degree of certainty their real debt service burden. However, any price index provides only an approximation to real return and, as a result, means that the selection of price index is key in designing indexed bonds.
December 22, 2024
