Index-Linked Bond

AAA

DEFINITION of '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."

INVESTOPEDIA EXPLAINS 'Index-Linked Bond'

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.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  3. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  4. Real Rate Of Return

    The annual percentage return realized on an investment, which ...
  5. Inflation

    The rate at which the general level of prices for goods and services ...
  6. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
RELATED FAQS
  1. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Full Answer >>
  2. What is inflation and how should it affect my investing?

    Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate ... Read Full Answer >>
  3. What type of asset allocation should I use if I am already retired?

    Among investors, asset allocation is a topic of discussion that receives a great deal of weight during the asset accumulation ... Read Full Answer >>
  4. What happens to the price of a premium bond as it approaches maturity?

    The price of a premium bond will decrease toward par value as the bond approaches maturity. Premium Bonds Vs. Discount Bonds All ... Read Full Answer >>
  5. What is the importance of calculating tax equivalent bond yield?

    Fixed-income investors measure portfolio returns using yields. Since most bonds do not produce high returns like equity markets, ... Read Full Answer >>
  6. What are the highest-yielding investment grade bonds?

    The investment grade bonds with the highest yield are all corporate bonds rated either BBB or Baa, depending on the credit ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  2. Options & Futures

    Introduction To Inflation-Protected Securities

    Inflation is an enemy to investors - except to those who invest in IPS, which guarantee a real rate of return with no credit risk.
  3. Options & Futures

    Top 4 Strategies For Managing A Bond Portfolio

    Find out how these strategies work and how you can put them to work for you.
  4. Retirement

    Index-Linked Certificates Of Deposit: Upside Potential, Low Risk

    Index-linked CDs generate returns similar to indexes, without the potential for loss.
  5. Professionals

    Is a Bond Market Selloff Coming?

    A big investment management company is concerned about bond market conditions and allocating more capital to cash. Should you follow?
  6. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  7. Investing Basics

    What is an Asset-Backed Security?

    An asset-backed security (ABS) is a debt security collateralized by a pool of assets.
  8. Stock Analysis

    Is Now the Time for Emerging Market Bonds?

    Higher yields and the potential for price appreciation await investors who take the plunge with emerging market bonds. Here's why.
  9. Investing

    Why Higher Rates Could Be Good News For Consumers

    While rates remain extraordinarily low by historical standards, in the last few months we have witnessed a modest change in the environment.
  10. Economics

    Explaining Tenor

    Tenor is the length of time to maturity of a debt, contract or loan.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!