- A bond that guarantees a return higher than the rate of inflation if it is held to maturity.
- Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate.
- The relationship between coupon payments, break-even inflation and real interest rates is given by the Fisher equation.
- A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
Why in News:
- Finance Minister P. Chidambaram in the Union budget for 2013-14, the government, in consultation with the Reserve Bank of India (RBI), decided to launch Inflation Indexed Bonds (IIBs) to wean away investors from the yellow metal (Gold) to paper-based savings instruments.
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