CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
A government issues a 10-year bond whose principal and coupon payments are adjusted for changes in a consumer price index. The primary purpose of this feature for the investor is most likely to:
The main purpose of an inflation-linked government bond is to protect the purchasing power of the investor's cash flows. Principal and coupons adjust with a consumer price index, so real returns are preserved. It is not designed to remove coupon reinvestment risk.
- Aprotect the purchasing power of the cash flows from inflationCorrect
- Block in a fixed real yield only if the bond is held to maturity
- Chedge the reinvestment risk of the coupon payments
Explanation
Inflation-linked bonds adjust cash flows for inflation, preserving purchasing power. The second option is a narrower, misleading statement and does not describe the purpose. Inflation indexation does not remove reinvestment risk of coupons.
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