What is an index-linked bond?
Also known as inflation-linked bonds, these securities offer interest payments which are adjusted for inflation. They work by linking their interest rates to a particular inflation index, such as the Retail Price Index in the UK.
Where have you heard about index-linked bonds?
These bonds can be used as a hedge against inflation. As a result, you may hear investors discuss them when the prices of goods and services in the wider economy start to rise at a particularly fast pace.
What you need to know about index-linked bonds.
When investing in a bond, you're effectively lending money to a company or a government. They agree to pay back the original sum you invest (the 'principal') after a specific period, as well as interest payments (the 'coupon') at set intervals.
With index-linked bonds, both the coupon and the principal are tied to a particular inflation index. These securities ultimately recognise that inflation can have an eroding effect on investors' money, and they therefore adjust their returns to any index movements.
Find out more about index-linked bonds.
Bonds take many forms, with index-linked products just one variety. To learn more about these securities, see bonds.