Indexed bonds, or inflation-indexed bonds, provide interest payments linked to a specific price index, with fixed coupon rates and semi-annual payments. These bonds typically offer higher returns during inflationary periods compared to fixed deposits, while also being less volatile and government-backed. Additionally, indexed bonds enhance government financing for infrastructure projects and allow for early redemption without tax benefits.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/sources-of-finance/indexed-bonds-meaning-examples-
advantages-and-more
Indexed Bonds

2. 1. Meaning
2. Example
3. Advantages
4. Indexed Bond vs Fixed Deposit
5. Reference
Content

3. A bond that releases interest payments on the basis of a particular price index is known as Indexed Bonds or Index-
Linked Bonds or Inflation-Indexed Bonds.
The coupon rate for interest remains fixed in Indexed-Linked Bonds. And interest payments happen mostly on a semi-
annual basis. While calculating returns/interest on payment dates on these Bonds, inflation-adjusted principal value is
taken into consideration.
Meaning

4. Suppose ADS Bonds are issued at a face value of $1000, with a coupon rate of 8% and a maturity of 1 year. The
payment of interest will happen on maturity together with the Principal amount. Further, assume The Consumer Price
Index at the time of Issuance is 155 whereas, at the time of maturity is 160.
Indexation Factor = 160/155 = 1.032
Inflation Rate = (160-155)/ 155 * 100 = 3.22%
At the time of maturity, the principal and interest repayment would be $1080 (1000 + 1000* 0.08).
The repayment value after considering inflation will be as follows:-
1080 * 1.032 = $1114.56
Thus, the total payment on maturity would be $1114.56. This amount consists of Original Principal: $1000; Interest at
Coupon Rate of 8% $80, and the inflation factor $34.56 (1000+80+34.56).
Example

5. • Provide inflation-adjusted returns to the investors.
• Generally yield higher returns in comparison to other types of Bonds.
• Are less volatile and less risky.
• As Government issues these types of Bonds, they are more authentic and risk-free in nature.
• Acts as one of the major sources of finance for the Government.
• Boost the infrastructural projects of the Government, thereby enhancing growth in the country.
• Sometimes, the Government issues these bonds to redistribute wealth in the economy and save the middle class,
retired or dependent people from the inflation effect.
• Indexed Bond allows premature redemptions, but does not give any additional tax benefit.
Advantages

6. • When Inflation takes place in the economy, Indexed-Linked Bond releases higher returns. While Fixed Deposit
releases fixed returns.
• Indexed-Linked Bond, in comparison to Fixed Deposit, is more liquid in nature.
• Mostly, Fixed Deposits do not have any secondary market for trading. Indexed-Linked Bond is tradable in nature.
Indexed Bond vs Fixed Deposit

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/sources-of-finance/indexed-bonds-meaning-examples-advantages-and-more