Inflation-indexed bond
Inflation-linked bonds (also inflation bond, inflation -linked bond, short linker, inflation or inflation -indexed bond Bond called ) are securities whose coupon and / or nominal value are linked to a consumer price index. The previously existing in Germany indexing ban was lifted with the introduction of the euro.
Differences from normal bonds
An inflation -linked bond to German " inflation- protected bond ," an investor provides protection against the risk of inflation. Typical representatives of this type of bond adjust the nominal value and / or coupon payments to the respective performance of an inflation index over the period of the bond issue to the appropriate payment of coupon and nominal value.
The inflation- protected bond is similar in terms of their interest payment of a floating-rate loan, with the difference that, in addition as well as the repayment of capital by the inflation trend may vary due to high. With inflation, the interest payment increases, which in a deflationary environment, it may also fall.
The coupon rate on an inflation hedged bond is also referred to as a real coupon, the yield of an inflation-proofed than real returns.
The phrase " real" points out that income from these bonds are not reduced by the inflation in the purchasing power - if the inflation index underlying reproduces a realistic picture of inflation.
For payment at maturity, two variants are used:
- In one variant, the nominal value is not diminished at maturity of the bond to the deflation or deflation, such as for German government bonds.
- In the other variant, such as is found in U.S. government bonds, for example, deflation also leads to reduction of the payment at maturity of the bond.
Coupon payment:
With i = 1, ..., n
Notional at maturity:
Where: CPI = consumer price index, CPI (0) = CPI at the time of issue, CPI (t ) = VPI time of payment
Advantages and Disadvantages
In inflation-linked bonds may depend on changes in the consumer price index excluding tobacco (HICP ex tobacco ) are benefiting from attractive coupon payments. Often a minimum return guaranteed, which will also be granted in the underlying index.
The capital protection only applies to the end of the term, in the meantime, fluctuations may occur whereby the quoted price can be considerably lower than the nominal value of the bond. In addition, the inflation-indexed bonds are not subject to deposit insurance which they are not protected in bankruptcy. Experts criticize the opacity of inflation-linked bonds, because here can be easily hidden costs.
Variants
Interest variant
In terms of rate variation of the capital value of the bond is not affected by the inflation index. Here is an Index Linked index coefficient is added to a fixed base rate at the emission at each coupon date or multiplied up.
Nominal value variant
In the variant of the nominal value paid interest and the accrued interest is calculated based on the modified nominal amount. This leads in time to an increasing absolute interest payment. On the due date of the Inflation- Linked Bond, the inflation- adjusted principal is paid. The nominal modification has an impact on the settlement amount on the purchase of such a document: in addition multiplied While regular bonds making up the amount of nominal times price is (plus accrued interest and fees) will be here with the indexation coefficient. The investor should check this value with the issuer or its bank before since the settlement amount depending on the configuration of the relevant security may vary in some cases more than 10%. The Order object is unmodified, and the coefficient is not priced at a premium.
Example
It is a constant inflation of 1.5 % per annum accepted. A fictitious inflation -linked bond pays a fixed coupon rate of 8% pa over a period of 30 years. In support of the bond 8 EUR per 100 nominal EUR are paid. After 10 years of operation, the nominal was raised due to inflation to 114.34 EUR. The interest payment thus rose to 9.15 EUR per year. At maturity per original 100 EUR nominal 154.00 EUR are paid out. The interest payment in the last year rose to 12.32 EUR per original 100 EUR nominal.
Taxation ( Germany )
Under German tax law, it was up to the introduction of the flat tax on inflation - linked bonds are so-called financial innovations.
Characteristics
Germany: Inflation-indexed government bond, inflation-linked Federal Obligation UK: Inflation-linked Gilt (ILG ) U.S.: Treasury inflation - protected security ( TIPS) or inflation - protected security ( IPS) Canada: Real Return Bond ( RRB )