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Daily inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation or deflation on a daily basis. They are thus designed to hedge the inflation risk of a bond. [1] The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. [2]
Both the UK and the US have issued inflation indexed government bonds to reduce their borrowing costs. When governments such as the UK and the US issue both inflation indexed bonds and regular nominal bonds, it gives them precise information on inflation expectation by observing the difference in yields between the two types of bonds.
Index-linked Savings Certificates are British inflation linked bonds from National Savings and Investments, the state-owned savings bank in the United Kingdom. The bond terms are typically 2, 3 or 5 years. The returns are linked to Retail Price Index (RPI) with a tiny added interest rate on top. The Bonds can now only be cashed in at maturity.
Treasury bonds (T-bonds or long bonds): are the treasury bonds with the longest maturity, from twenty years to thirty years. They also have a coupon payment every six months. Treasury Inflation-Protected Securities (TIPS): are the inflation-indexed bond issued by the U.S. Treasury.
Lowe advocated indexation as applied to bonds, but also to wage contracts and land rents. [17] His advocacy of a "tabular standard" (a precursor of the indexed unit of account ) has been recognised as a technical advance in monetary analysis; [ 18 ] Lowe used the terms "standard of reference" or "table of reference"; [ 19 ] the idea itself, and ...
The Education Department announced an update to the SAI tables that will allow students to benefit from an additional $1.8 billion in aid. (Credit: Getty Images) (Richard Stephen via Getty Images)
Inflation swaps are the linear form of these derivatives. They can take a similar form to fixed versus floating interest rate swaps (which are the derivative form for fixed rate bonds), but use a real rate coupon versus floating, but also pay a redemption pickup at maturity (i.e., the derivative form of inflation-indexed bonds).
Non-indexed units, such as contracts written in nominal currency units and nominal monetary items, incur inflation or deflation risk in the case of monetary items. During all periods of inflation , the debtor pays less in real terms than what both the debtor and creditor agreed at the original time of the contract or sale.