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LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

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Inflation linked bonds, also known as inflation-indexed bonds or simply TIPS (Treasury Inflation-Protected Securities), are bonds that provide protection against inflation. They are issued by governments and corporations as a way of raising funds that can be used for various projects and capital investments.

The principal feature of inflation linked bonds is that they are linked to an index of inflation, which means that the return on the bond is adjusted to reflect changes in the inflation rate. This is achieved by adjusting the principal amount of the bond based on changes in the Consumer Price Index (CPI) or another inflation index, so that the real value of the bond is maintained over time.

For example, if you buy an inflation-linked bond with a principal amount of $1,000 and the inflation rate is 2%, the principal amount will be adjusted to $1,020 after one year. If the inflation rate is 4% the next year, the principal amount will be adjusted to $1,068.80. Therefore, the return on the bond is not only based on the coupon rate, but also on the increase in the principal amount due to inflation.

Inflation linked bonds are popular with investors because they provide a means of keeping pace with inflation, which can erode the value of a portfolio over time. They are also generally considered to be a safer investment than regular fixed-rate bonds since they offer protection against inflation and the risk of default.

Inflation linked bonds are typically issued by governments, but they are also offered by corporations as a way of raising capital. Corporate inflation linked bonds may offer higher yields than government bonds, but they also come with higher risk.

One important factor to consider when investing in inflation linked bonds is the real yield, which is the yield adjusted for inflation. This is the return that the investor will receive after accounting for the effects of inflation. The real yield can be negative if the inflation rate is higher than the coupon rate on the bond.

In conclusion, inflation linked bonds are a unique investment product that provides protection against inflation. They are popular with investors who want to keep pace with inflation while also benefiting from the safety of fixed-income investments. However, investors should carefully evaluate the real yield and the risk associated with these bonds before investing.