What Are Inflation-Indexed Bonds?

Inflation indexed bonds (IIS) refer to bonds whose principal and interest payments are adjusted according to changes in the established inflation index. When such bonds are issued, an actual coupon rate is usually determined. In addition to the interest rate standard determined on the face of the bond, the payment of the maturity is also subject to the inflation rate during the period specified by the bond terms. The payment is adjusted according to the inflation rate during the duration of the bond. There are different types of inflation indexed bonds, the most basic of which can be summarized into two basic forms: principal indexation and interest rate indexation.

Inflation indexed bond

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The first is the credibility of the price index . As far as IIS is concerned, choosing different price indexes will make investors' liabilities face different

There are different types of IIS designs, the most basic of which can be summarized into two basic forms: principal indexation and interest rate indexation, the most extensive form of which is principal indexed bonds. In addition, there are cash bonds, annuity indexed bonds and zero coupon indexed bonds.

In inflation index bonds, the choice of price index is very important. The selected index should be widely understood by investors and there should be no announced delays.

Bond

In inflation index bonds, the choice of price index is very important. The index chosen should be widely understood by investors without delays or short delays in publication. There are many price indexes that reflect the inflation of a country, but the most widely used is the consumer price index CPI. Because CPI is the most commonly used and stable indicator to describe inflation, most countries today use the CPI index to issue IIS. According to the characteristics of China's price index system, it is recommended to choose CPI as the reference index for price inflation index bonds.

Inflation index bonds use beginning and end price indices. You can choose either a month-on-year price index or an average price index for a certain period of time. The consumer price index at the beginning and end of the period is actually the average price over a period of time. Statistically, there is only a monthly price index at most, so the opening and closing figures can be the consumer prices of the month, the average consumer prices of the current quarter, the average consumer prices of half a year, or even the average annual consumer prices. Therefore, if it is an annual interest-bearing index bond, a monthly year-on-year price index is considered as the beginning and end price index. For a semi-annual interest-bearing index bond, a monthly fixed-base index is used (since China has not announced this index, it needs to adopt Monthly year-on-year index conversion).

In summary, the interest rate period of the inflation index bond can be one year or half a year, and the semi-annual interest payment prepayment method or the annual interest payment post-set method can be used; the beginning and end monthly price data can be used. For annual interest payment, it is recommended to use November's year-on-year price index; for semi-annual interest payment, it is recommended to choose May and November price index. From international experience, the maturity of inflation index bonds should be relatively long, and can be more than 10 years. The reasons are: First, the longer the maturity of the bond, the greater the risk of fixed interest rates. The second is the long maturity, which can reflect the advantages of inflation index bonds.