Inflation-indexed bond
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Inflation-indexed bond is a debt security whose cash flows are linked to a published price index so that the value of principal, and often the coupon, adjusts for inflation. The instrument is also called an inflation-linked bond or a linker. Designs vary by market. Examples include Treasury Inflation-Protected Securities in the United States and Index-linked gilts in the United Kingdom. Programmes differ in the reference index, the indexation lag and whether a deflation floor at par applies. These choices affect valuation, taxation and the degree of basis risk for holders whose personal inflation may differ from the reference index.
A common summary measure derived from these bonds is Breakeven inflation, which compares the yield on a nominal bond with the yield on a similar inflation-indexed bond. Breakevens are informative about expected inflation in the relevant market and horizon, although they can also reflect risk premia and liquidity premia. Investors use inflation-indexed bonds to preserve purchasing power, to match indexed liabilities and to diversify portfolios alongside nominal bonds, equities and other assets.