Type of index-linked bonds that offers investors protection against inflation by linking the bond’s coupon payments and/or the principal repayment to an index of consumer prices (e.g. CPI).
Interest-indexed bonds have their coupon rates adjusted for inflation. The principal remains unchanged throughout the tenor, and is fully repaid on maturity.
Indexed zero coupon bonds pay no coupons throughout the tenor of the bond. They are sold at a discount from the start, and the principal repayment is adjusted for inflation at maturity.
Capital-indexed bonds have their principal adjusted throughout the life of the bond based on the inflation index. The coupon rate is a constant percentage of the principal, and because the principal is changing, the coupon payout for each period is also different, depending on the inflation index. At maturity, the principal, adjusted for inflation, is repaid.