CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
A government issues bonds whose coupon and principal payments are adjusted for changes in a consumer price index. Relative to a conventional fixed-rate bond, these inflation-linked bonds most likely:
Inflation-linked bonds most likely protect investors against unexpected inflation, because coupons or principal are adjusted by a price index and so preserve real returns. When inflation falls, the government's nominal payments decline rather than rise.
- Aprotect investors against unexpected inflationCorrect
- Bexpose investors to greater reinvestment of principal at issuance
- Cincrease the government's nominal payments when inflation falls
Explanation
Index-linked payments rise with inflation, preserving real returns for investors. When inflation falls, nominal payments are lower, not higher, so the third option is wrong. The second option is not a feature of such bonds.
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