What is the inflation binding?

Inflation bond is generally a bond issued by the government. These links have built -in protection against loss of their value due to inflation. With these bonds, the amount of the main investor increases with any increase in the level of inflation that occurs in the emitter. As a result, the interest rate of inflation bond will return higher monthly payments to investors if it is connected to an increased amount of principal. Inflation inflation bonds will lose a little of its values ​​at the time of deflation, causing the stagnation of the director and causing the bond to lag behind other higher bonds on the market. In return for their loans, investors are granted regular interest payments and any return on the amount of principal, which was originally borrowed. If inflation increases considerably from the bond during t, investors may not get quite the value they want from their investment. As a result, governments can issue some kind of bond associated with inflation as a way to get investors somehowfor protection from high inflation.

with a bond associated with inflation of investor loans provide the amount of principal and the interest rate, also called the coupon rate, for regular interest payments. At any moment during the bond life, the main amount may increase the amount of the main one, if an economic indicator, usually a national price index, indicates a growing inflation. As a result, interest payments will increase accordingly.

For example, imagine that the investor is buying a bond associated with inflation for $ 100 (USD) with a 10 % coupon rate, which means that interest payments are usually $ 10. At some point in life, inflation in the United States increases by five percent. Renching that the bond director will also increase by five percent to $ 105. The 10 percent interest rate, which applies to this new amount, provides interest payments that have increased to $ 10.50.

the most important factor inInflation binding is profitable is a certain degree of inflation during the life of the bond. Because inflation is expected for these bonds, the coupon levels are generally much lower than for bonds whose main numbers remain static. As a result, the lack of inflation means that inflation bonds do not return at almost the same speed as other bonds.