DEFINITION of 'Corporate Inflation-Linked Securities'

Corporate inflation-linked securities (CIPS), also referred to as inflation-linked bonds, are fixed income securities that have a coupon rate that is indexed to inflation. As the bond yields adjust monthly, they provide an income that responds rapidly to changes in inflation.

BREAKING DOWN 'Corporate Inflation-Linked Securities'

Corporate inflation-linked securities can provide investors with some inflation protection, like Treasury inflation-protected securities (TIPS) -whose bond principal varies with inflation. They also provide extra diversification, as they have a low correlation with other asset classes, and can reduce a bond portfolio's interest rate sensitivity or duration, because they are usually offered with maturities of five to ten years. However, there is a trade-off. When inflation is low, CIPS produce below-average returns compared to traditional corporate bonds.

The coupon rate — which can have a ceiling, and may only be partially floating — is typically aligned with an established measure of inflation such as the consumer price index, and updated monthly. For example, we have a corporate inflation-linked bond with a coupon rate of 5.000%, and a par value of $1,000. When purchased, the bondholder would receive $50 per year in payments. If, because of inflation, bond holders should receive, $75 per year, then the coupon rate needs to increase to 7.500% (7.500% x $1,000 = $75).

Corporate Inflation-Linked Securities Are Not Mainstream

The majority of CIPS are issued by financial institutions. Because most of these issues are small, it is hard for retail investors to find CIPS offerings — unless they work with a specialist bond broker. And while CIPS do provide investors with much higher nominal yields, they expose investors to the same credit risk, interest rate risk and default risk as regular corporate bonds.

  1. Inflation-Protected Security - ...

    An inflation-protected fixed income security, typically issued ...
  2. Bond

    A bond is a fixed income investment in which an investor loans ...
  3. Zero Coupon Inflation Swap

    A zero coupon inflation swap is an exchange of cash flows that ...
  4. Bond Valuation

    Bond valuation is a technique for determining the theoretical ...
  5. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  6. Coupon

    A coupon is the annual interest rate paid on a bond, expressed ...
Related Articles
  1. Investing

    Curbing The Effects Of Inflation

    Your investments suffer when general price levels rise. Learn how you can control the damage with IPSs.
  2. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  3. Investing

    Bond Portfolios Made Easy

    Bonds have typically been viewed as stocks' less-glamorous sidekick, but they deserve a little more respect from investors.
  4. Investing

    TIPs Still Make Sense For Portfolios

    Despite their recent rout and the persisting negative yields, there’s still plenty to like about TIPS bonds for investors’ portfolios.
  5. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  6. Investing

    TIPS ETFs: No Inflation, No Reason to Buy

    No inflation means there's no reason to buy TIPS ETFs.
  7. Investing

    How Rising Interest Rates and Inflation Affect Bonds

    Understand bonds better with these four basic factors.
  8. Financial Advisor

    Calculate PV of different bond type with Excel

    To determine the value of a bond today — for a fixed principal (par value) to be repaid in the future — we can use an Excel spreadsheet.
  9. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
  1. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  2. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  3. What are the risks of investing in a bond?

    Are you thinking of investing in bond market? Learn more about bond market investment risk, including interest rate risk, ... Read Answer >>
  4. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    See how fixed-income security investors can expect to use coupon rates on semi-annual payments if the bond or debt instrument ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center