An inflation-indexed bond (also known as an inflation-linked bond) is a bond in which payment of interest income on the principal is related to the consumer price index (CPI), which is used to calculate the rate of inflation. This feature provides protection to investors by shielding them from changes in the underlying index.
“The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services.”
“Inflation-linked bonds are securities that protect the purchasing power of the investment. The bond is provided with a fixed real coupon” (constant interest rate). “The nominal coupons and the nominal face amount (and thus the repayment of the principal) are calculated by increasing the real quantities based on the increase in the inflation rate.”
“Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.”
These bonds were issued in 1780 in Massachusetts by the Commonwealth of Massachusetts during the Revolutionary war. These were issued to U.S. soldiers as deferred compensation for their service. These bonds were invented to deal with severe wartime inflation and with angry discontent among those soldiers with the decline in purchasing power of their pay.
Below is a rendered image of the flag of the Commonwealth of Massachusetts:
[ux_image_box img=”938″ link=”https://en.wikipedia.org/wiki/Massachusetts” target=”_blank”]
- https://www.lazardassetmanagement.com/docs/-m0-/6034/An IntroductionToInflation-LinkedBonds_LazardResearch_en.pdf, page 3.
- https://www.nber.org/papers/w10183.pdf, page 5.