Inflation-indexed bond

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An inflation indexed bond (also inflation bond or inflation-bond , more - derived from English - designations are Inflation-linked bond , short linker , inflation bond and inflation-indexed bond ) is a bond , the coupon and / or nominal value to a consumer price index is coupled. The previously existing in Germany indexing ban was created using the euro canceled launch.

properties

An inflation-indexed bond offers the investor protection against the risk of inflation . Typical representatives of this type of bond adjust the nominal and / or coupon payments to the respective development of an inflation index in the period from the issue of the bond to the respective payment of the coupon or nominal.

The inflation-indexed bond is similar in terms of its interest distribution to a floating-rate bond, with the difference that the capital repayment can also vary depending on the inflation trend. In the event of inflation, the interest distribution rises; in the event of deflation , it falls, unless a special agreement has been made for this case in the construction of the bond.

The coupon of inflation-protected bond will be as real coupon , the return on an inflation-proofed as real return referred.

The wording “real” underlines that the income from this bond will not be reduced in purchasing power by inflation - provided the underlying inflation index reflects a realistic picture of inflation developments.

Two variants are common for payment when due:

  • In one variant, even in the event of deflation, the nominal value is not reduced by the deflation when the bond matures. B. with German government bonds .
  • In the other variant, as it is e.g. For example, found in US Treasuries, deflation also leads to a reduction in the payment when the bond matures.

If the bond is issued at time 0 , the coupon payment at time t depends on the consumer price index CPI as follows:

;

the nominal value at the end of the term T is determined as:

.

Advantages and disadvantages

With inflation bonds, depending on the changes in the consumer price index excluding tobacco products (HICP ex tobacco), attractive coupon payments can be benefited. A minimum rate of return is often guaranteed, which is also granted when the index trend is lower.

The capital , however, protection applies only to the end of maturity . In the meantime, the price may fluctuate and also fall below the face value of the bond. In addition, the inflation bonds are not subject to deposit protection , which means that they are not protected in the event of bankruptcy . Experts also criticize the opacity of inflation bonds, because hidden costs can easily arise here.

variants

Interest rate variant

With the interest rate variant, the capital value of the bond is not influenced by the inflation index. Here, an index-dependent index coefficient is added or multiplied to a base rate fixed at the time of issue for each coupon date.

Nominal value variant

With the nominal value variant, the interest paid and the accrued interest are calculated on the basis of the modified nominal. Over time, this leads to an increasing absolute interest payment . To Maturity schedule of the bond, the inflation-adjusted nominal will be paid. The nominal modification also has an impact on the settlement amount when buying such a paper: While with normal bonds the negotiating amount is the nominal times the price (plus accrued interest and expenses), it is also multiplied by the indexing coefficient. Investors should inquire about this value from the issuer or their bank in advance, as the settlement amount can vary by more than 10 percent in individual cases, depending on the structure of the security in question. The order is placed unmodified, and the coefficient is not priced in the price.

example

Assume a constant inflation rate of 1.5 percent annually. A fictitious inflation-indexed bond pays a fixed coupon of 8 percent p. a. over a term of 30 years. When the bond is issued, 8 euros per 100 euros nominal will be paid. After 10 years, the nominal was raised to 114.34 euros due to inflation. The interest payment increased to 9.15 euros per year. When due, 154.00 euros will be paid out for each original 100 euros nominal. The interest payment last year rose to EUR 12.32 per original EUR 100 nominal.

Taxation (Germany)

According to German tax law, inflation-indexed bonds were among the so-called financial innovations until the withholding tax was introduced . However, the Federal Fiscal Court has described the exchange rate gains / losses as separable from interest income (BFH November 20, 2006 (VIII R 97/02)). This means that the price gain / loss after a 1-year holding period is not taxable at least until 2009. The tax offices may not judge the papers uniformly (as a financial innovation or according to the BFH judgment).

Expressions

See also

Individual evidence

  1. ↑ Internet site on inflation-indexed federal securities , Finance Agency, accessed on June 22, 2015
  2. ↑ Thorsten Lehnert, Aleksandar Andonov, Florian Bardong: TIPS, Inflation Expectations, and the Financial Crisis . In: Financial Analysts Journal . tape 66 , no. 6 , December 2010, doi : 10.2469 / faj.v66.n6.1 ( entry at cfapubs.org ).