Money Excel - Personal Finance Blog

Menu
MENUMENU
MENUMENU
  • Home
  • Business Ideas
    • 225 Small Business Ideas
    • 40 Online Business Ideas
    • 20 Business Ideas for Beginners
    • 20 small manufacturing business
    • 30 Food Business Ideas
    • 100 Business Ideas low investment
  • Stock Market
    • Best Demat & Trading Accounts 2020
    • Best Stocks 2020 by Experts
    • Best Virtual Trading Apps
    • Best Stock Screener
    • Best Discount Brokers in India
    • Multibagger Stocks of LockDown
    • Rakesh Jhunjhunwala Portfolio
  • Mutual Funds
    • Best Mutual Funds 2020-21
    • Best Direct Mutual Fund Platform
    • Best Mutual Fund Mobile Apps
  • Incometax
    • Income Tax Slab FY 2020-21
    • Income Tax Calculator FY 2020-21
    • Income Tax Refund Request
    • Pay Advance Tax Online
    • Download New 15G -15 H Forms
  • Investment
    • Best Investment Ideas 2020
    • Long Term Investment Options
    • Best Investment Regular Income
    • Best Investment Options NRI
  • Credit Card
    • Best Credit Cards 2020-21
    • Best credit card for online shopping
    • Best Forex Card in India
    • Best Business Credit Cards
    • Credit Cards against Fixed Deposit
  • Insurance
    • Best Term Insurance Plans 2020
    • Best Health Insurance 2020
    • Best LIC Policy 2020
    • Best Car Insurance Companies
    • Best Mobile Insurance Companies
  • Downloads
Home
Personal Finance
It’s all about inflation-indexed bonds (IIB)

It’s all about inflation-indexed bonds (IIB)

Raviraj Parekh August 2, 2020

inflation

Inflation is always bringing problem to normal person but this time Inflation may provide you benefit Yes Inflation Indexed Bond (IIB) is another financial product which will be launched on June,4, 2013 with a maturity of 10 years. The intention behind the launch of IIB is to provide real returns to investors and reduce physical gold buying binge. Let’s check out details about IIB.

Meaning of IIBs:

IIB is debt instrument which attempt to give return higher than inflation rate if it is held up to maturity. Investors seeking safe returns with little to no risk will often hold inflation-indexed securities. In other words, an inflation-indexed security guarantees a real return. Here principal amount is linked to the inflation rate so that the impact of inflation on the capital amount is reduced.

Do not miss below posts -
  • 7 New Year Resolutions for Better Financial life 2016
  • Financial services offered by Post Office
  • 10 Best Saving Bank Account to earn maximum interest

Inflation Indexed Bonds will have a fixed real coupon rate and an adjustable principal value indexed by the inflation benchmark chosen. During every interest payout, the face value of the bond gets adjusted with the Reference inflation numbers and the interest amount is calculated from the adjusted figures. Hence, the interest amount is also linked to the inflation. At maturity, the adjusted principal or the face value, whichever is higher, will be paid. Thus these bonds provide inflation protection to both principal and coupon payment.

Regular Bond versus IIBs

Let us illustrate the difference between a regular bond and an IIB with an example. Assume that both bonds have a face value of Rs 1,000, a tenure of five years and a coupon rate of 10% per annum payable annually. The table on the left shows the difference in the cash flow from these bonds.

IIB

The regular bond continues to pay Rs 100 to the bondholder till maturity, irrespective of the inflation rate, whereas the IIB adjusts its interest payments depending on the inflation rate. As the inflation rate changes every year, so does the cash flow from the IIB.

The other advantage of the IIB is that it not only adjusts the interest payments to inflation but also the principal repaid to the investor at the end of the bond’s tenure. In the final year, the higher of the original principal or the inflation-adjusted principal is paid to the bond holder The benefit of an IIB over a regular bond is clearly visible in the higher internal rate of return (IRR) for the investor.

Flipside of IIBs

Although inflation-indexed bonds prove beneficial during times of high inflation, they underperform when the economy goes through a deflationary phase and prices actually come down. In such a situation, the IIB will give lower than the coupon rate because the principal would get adjusted below Rs 1,000. However, this is only a theoretical risk. Practically IIB seems to advantageous compare to normal bonds.

Do not miss below posts -
  • PF withdrawal process and rules
  • 20 tasks that can be done at ATM now
  • Jan Lokpal Bill & Your Finance

When can IIBs work for you?

You see in an inflationary scenario, where prices are on a rise and have an effect of eroding the value of hard earned savings, IIBs can work well for you. But during deflationary phase, they may not yield you much luring returns since them being linked to WPI inflation.

Prev Article
Next Article
Tags:adjusted bond bonds iib indexed inflation principal rate

About The Author

Raviraj Parekh

Raviraj is the man behind moneyexcel.com. He is PGDBA, engaged in blogging for 10 years. Moneyexcel blog is ranked as one of the Top 10 Personal Finance Blog in India. He is not affiliated with any financial product, service provider, agent or broker. The purpose of this blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

One Response

  1. Annapurna

    An informative post on IIBs. But,given the interest rate uncertainity over such a long term, the open ended bond funds may be a better bet,as they too provide indexation benefit.

    May 25, 2013

Leave a Reply

Cancel reply

IIFL Demat Account

Search

Top Posts & Pages

  • Income Tax Calculator FY 2020-21 (AY 2021-22) – Excel Download
  • Rakesh Jhunjhunwala Portfolio Holdings - January 2021
  • How to check Property Records and Land Records online in India?
  • LIC Premium Paid Certificate Download For Income Tax Purpose - Online
  • 20 small manufacturing business ideas with low cost
  • 225 Small Business Ideas with Low Investment in 2021-22
  • Cash Deposit Machine Locator – How to find CDM Near You?
  • Income Tax Calculator FY 2019-20 (AY 2020-21) - Excel Download
  • Top 60 Manufacturing Business Ideas
  • 10 ways to Convert Black Money to White

Subscribe to Blog via Email

Join 5,473 other subscribers

Follow MoneyExcel

Money Excel – Personal Finance Blog

Personal Finance Blog
Copyright © 2021 Money Excel - Personal Finance Blog
| About |Downloads | Contact Us | Sitemap | Disclaimer | Privacy Policy |