CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
An investor is concerned that inflation will rise and erode the real value of fixed coupon payments. Which bond structure is most likely to address this concern?
An inflation-linked bond is most appropriate. Its coupon or principal adjusts with a price index, so payments keep their purchasing power when inflation rises. Step-down and deferred coupon bonds follow preset schedules that do not respond to actual inflation.
- AA step-down coupon bond
- BAn inflation-linked bondCorrect
- CA deferred coupon bond
Explanation
An inflation-linked bond adjusts its coupon or principal for changes in an inflation index, preserving purchasing power. A step-down coupon follows a preset declining schedule and a deferred coupon only delays payments, so neither responds to actual inflation.
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