An index-linked bond (also known as an inflation-linked bond or real return bond) is a fixed-income security where the payments to bondholders—coupon payments, principal or both – are adjusted in accordance with the changes in a designated index, most commonly the Consumer Price Index (CPI).
This adjustment helps protect investors from inflation eroding purchasing power. For example, as inflation rises, the principal value of the bond is increased, so subsequent interest payments (computed on the adjusted principal) also rise. In many markets, these are issued by governments.
