What is an indexed binding?
The indexed bond is an investment vehicle that is structured in the same way as a normal bond with special protection added to alleviate damage caused by inflation. The bond will achieve this by interconnecting interest payments and, if it is held to maturity, return the principal to some kind of national price index. As the index rises and the return rate for investors holds a bond. In this way, investors who buy an indexed bond can be provided by a promised return rate if they hold the bond until maturity.
, normally, the bond returns regular interest payments to investors at a predetermined rate known as a coupon. In addition, the investor who holds the bond to maturity is guaranteed a return on the original director paid for the purchase of a bond. This type of bond does not take into account the fact that the value of revenues obtained from the bond may not maintain a step with rising prices in the economy. To help eliminate tdvalvace investment that can inflation zThe investor can buy an indexed bond.
The key characteristic of the indexed bond is the way its revenues are based on some kind of price index, such as the consumer price index (CPI) in the United States measuring inflation. If the benchmark index increases, the voucher payments will increase about the same amount from the investor at each regular interval. At the end of the detention term, the director is also modified to reflect the effect if inflation.
This process ensures that an investor holding an indexed bond will gain the rate of return he wants. For example, an investor who receives a four percent coupon rate for a bond held for five years if inflation increases by seven percent at the same time. In such a situation, the investor in Essence loses money for investment by holding a bond for maturity.
when buying indexedSeveral other disadvantages should be considered. Although the director is protected, if the binding is held to maturity, the value of the binding may fluctuate when it is held. This may be problematic if the bond holder attempts to sell a bond at some point before maturity. In addition, investors must realize that the reduction of inflation at any point during the bond term will negatively affect the value of the interest payments it receives.