Ad
related to: inflation indexed bonds upsc question
Search results
Results From The WOW.Com Content Network
The real yield of any bond is the annualized growth rate, less the rate of inflation over the same period. This calculation is often difficult in principle in the case of a nominal bond, because the yields of such a bond are specified for future periods in nominal terms, while the inflation over the period is an unknown rate at the time of the calculation.
One of the biggest enemies investors face is inflation. Slowly but inexorably, the impact of rising prices robs purchasing power from your savings and investments, forcing you to find ways to make ...
For example, if you buy a two-year bond paying 1%, by the time that bond matures you may be able to earn 2% or more on your new bond. You can keep repeating this pattern for as long as inflation ...
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.
But if actual inflation exceeds expected inflation during the life of the bond, the bondholder's real return will suffer. This risk is one of the reasons inflation-indexed bonds such as U.S. Treasury Inflation-Protected Securities were created to eliminate inflation uncertainty. Holders of indexed bonds are assured that the real cash flow of ...
Some zero coupon bonds are inflation indexed, and the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power, rather than a set amount of money, but most zero coupon bonds pay a set amount of money known as the face value of the bond. Zero coupon bonds may be long or short-term investments.
The equation is an approximation; however, the difference with the correct value is small as long as the interest rate and the inflation rate is low. The discrepancy becomes large if either the nominal interest rate or the inflation rate is high. The accurate equation can be expressed using periodic compounding as:
There is a time dimension to the analysis of bond values. A 10-year bond at purchase becomes a 9-year bond a year later, and the year after it becomes an 8-year bond, etc. Each year the bond moves incrementally closer to maturity, resulting in lower volatility and shorter duration and demanding a lower interest rate when the yield curve is rising.