CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
Which type of sovereign bond is most likely to be issued by a government to protect investors against a decline in purchasing power?
An inflation-linked bond is the best answer. Its principal or coupons are adjusted for changes in a price index, so investors keep their purchasing power. Zero-coupon and fixed-rate bullet bonds pay fixed nominal amounts, which lose real value when inflation rises.
- AZero-coupon bond
- BInflation-linked bondCorrect
- CFixed-rate bullet bond
Explanation
Inflation-linked bonds adjust principal or coupon payments for changes in a price index, so the real value of the cash flows is preserved. Zero-coupon and fixed-rate bullet bonds pay nominal amounts that are fixed in advance, so inflation erodes their real value.
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