Index-Linked Bond

A bond in which payment of income on the principal is related to a specific price index - often the Consumer Price Index. This feature provides protection to investors by shielding them from changes in the underlying index. The bond's cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return.

In Canada, they also referred to as "real return bonds."

This type of bond is valuable to investors because the real value of the bond is known from purchase and the risk involved with uncertainty is eliminated. These bonds are also less volatile than nominal bonds and they help investors to maintain their purchasing power. For example, assume that you purchase a regular bond with a nominal return of 4%. If inflation is 3%, you will actually only receive 1% in real terms. On the other hand, if you buy an index-linked bond your cash flow will be adjusted to changes in inflation and you will still receive the full 4% in returns.

Investment dictionary. . 2012.

Look at other dictionaries:

  • index-linked bond — Fin a security where the income is linked to an index, such as a financial index. See also index linked gilt, index linked savings certificate …   The ultimate business dictionary

  • Index-linked Savings Certificates — are inflation linked bonds from National Savings and Investments the state owned savings bank in the United Kingdom. The bond terms are typically 2,3 or 5 years. The returns are linked to the RPI (not CPI) with an escalating premium on top. The… …   Wikipedia

  • index-linked gilts — gilts where the coupon payments and capital redemption value are linked to the increase in the Retail Price Index over the period the bond has been in issue. The bigger the increase in the Retail Price Index, the bigger the value of the coupon… …   Financial and business terms

  • linked bond — bond whose capital sum is linked to the index or to the rate of exchange …   English contemporary dictionary

  • index-linked savings certificate — Fin a National Savings Certificate issued by the U.K. National Savings organization with a return linked to the rate of inflation. Also known as granny bond …   The ultimate business dictionary

  • index-linked gilt — Fin an inflation proof U.K. government bond, first introduced for institutional investors in 1981 and then made available to the general public in 1982. It is inflation proof in two ways: the dividend is raised every six months in line with the… …   The ultimate business dictionary

  • Dollar Bond Index-Linked Securities - Dollar BILS — A zero coupon floating rate debt instrument with an interest rate that is determined by the return performance of a specified index over a given time period. The interest rate for dollar BILS is determined at maturity, once the change in the… …   Investment dictionary

  • Bond (finance) — In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity.… …   Wikipedia

  • index bond — bond whose principle is linked to the index or the dollar rate …   English contemporary dictionary

  • bond linked to the Cost of Living Index — promissory note that is dependent upon the index of how much it costs to live in the country …   English contemporary dictionary

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