Inflation Linked Bonds, which are also known as Inflation Indexed Bonds or Linkers, are bonds in which principal amount is linked to the inflation i.e. if the inflation prevailing in the market is high, then the principal amount to be paid to the holders of the Inflation Linked Bonds would also be high. Inflation Linked Bonds are aimed at saving the investors or owners of the bonds from the inflation risk.
Massachusetts Bay Company was the first to issue Inflation Linked Bonds in 1780. The British government first issued Inflation Linked Bonds in 1981. Like many other bonds, Inflation Linked Bonds regularly pay interest during the bond period while the principal amount is paid at the end of the maturity period. The value of the interest payment is derived at after adding the nominal coupon rate to the product of inflation index.
In some types of Inflation Linked Bonds, the direct changes are made in the interest rate depending on inflation. An increase in the interest paid to the holder or owner is directly proportional to inflation. Series I Savings bonds issued in the United States is an example of such bonds.
In other types of Inflation Linked Bonds, the principal amount paid to the investors changes with an increase in inflation indirectly increasing the interest payment too by multiplying the interest payment by the rate at which principal amount was increased. Treasury Inflation Protected Securities (TIPS) issued by the US treasury is the example of such kinds of bonds.
Most of the Inflation Linked Bonds issued in the market are sovereign bonds while the Inflation Linked Bonds issued by the private companies are very less in number.
Treasury Inflation Protected Securities and Series Inflation Indexed Savings bonds, both issued by US Treasury; Inflation Linked Gilt issued by UK Debt Management office; Reat Return bond, issued by Bank of Canada; Capital-Indexed bonds issued by Department of Treasury in Australia; JGBi issued by Swedish National Debt Office are some of the examples of Inflation Linked Bonds issued in many countries.
Inflation Linked Bonds are issued by governments or corporate.
In case of rise in inflation, the principal amount to be priced to the holder or owner of the Inflation Linked Bonds would increase. As a result, the interest paid to the investor will also increase. At the time of maturity, the increased principal amount is paid to the owner, thereby preventing from facing inflation risk.
Inflation Linked Bonds are best for those investors who want to take benefit from the rising inflation.