What is the significance of inflation-linked bonds?

The significance of inflation-linked bonds lies in their ability to provide returns that adjust with inflation. These bonds are specifically designed to protect investors from the eroding effects of inflation on purchasing power. The principal amount and the interest payments are adjusted based on changes in a specified inflation index, such as the Consumer Price Index (CPI). This means that as inflation increases, the returns on these bonds also increase, ensuring that investors maintain their real returns and do not lose value in an inflationary environment. This feature makes inflation-linked bonds particularly attractive during periods of rising prices, as they safeguard the investor's return against the negative impact of inflation.

In contrast, tax-exempt status, fixed interest rates, and corporate issuance do not inherently apply to all inflation-linked bonds. While some bonds might be tax-exempt, it is not a universal characteristic of inflation-linked bonds. Unlike regular bonds that have fixed interest rates that do not vary regardless of inflation trends, inflation-linked bonds adjust their returns. Additionally, these bonds can be issued by various entities, including governments and municipalities, not just companies.