How Indexed Bonds Work
INFLATION PAYMENT Every six months, the principal is adjusted by an amount equal to the CPI, payable only when the bond is sold or matures.
INTEREST PAYMENT Bondholders receive a check twice a year for an amount equal to the principal multiplied by the interest rate.
On a $1,000 bond, if the interest rate is 3% and inflation is 1% after six months, the principal is adjusted to $1,010. The investor then receives a semiannual interest payment of $15.15. If inflation rises to 3% by yearend, the principal is adjusted to $1,030. The investor also receives another interest payment of $15.45. Assuming similar inflation over 10 years, the investor will receive $351.64 in interest payments while the principal will have risen to $1,343.92.
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Updated Oct. 9, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.