CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
A government issues a bond whose principal and coupons are adjusted for changes in a consumer price index. Relative to a conventional fixed-rate bond of the same maturity, the inflation-linked bond is most likely to:
An inflation-linked bond most likely reduces the investor's exposure to unexpected inflation, because its principal or coupons rise with the price index. It still carries real interest rate risk, so its price can fluctuate and volatility is not eliminated.
- Aprotect investors from changes in real interest rates
- Breduce the investor's exposure to unexpected inflationCorrect
- Celiminate all price volatility for the investor
Explanation
Index-linked cash flows rise with inflation, so the real value of payments is preserved and unexpected inflation hurts less. The bond's price still changes when real yields change, so it does not protect against real rate changes or eliminate price volatility.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Markets for Government Issuers shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Markets for Government Issuers questions
- A sovereign government borrows mainly in its own currency and has a central bank able to create that currency. Compared with a sovereign bor…
- A government issues a 10-year inflation-indexed bond with a principal of 1,000 and a 2% annual coupon paid on the inflation-adjusted princip…
- A government wants to issue a new 10-year bond and, in the primary market, sells it directly to a pool of dealers who compete by submitting …
- Compared with a general obligation bond of a local government, a revenue bond issued to finance a stadium is most likely to:
- Which development is most likely to improve the credit quality of a sovereign issuer that borrows heavily in a foreign currency?
- An analyst evaluates bonds issued by a government-sponsored agency that has no explicit guarantee from the national government. Compared wit…