TAILIEUCHUNG - Benefits and Limitations of Inflation Indexed Treasury Bonds

With an indexed bond, the interest and maturity value are adjusted by the rate of inflation over the life of the bond. Because the cash flow of an indexed bond is adjusted for inflation, the bond’s real value does not vary with inflation, protecting investors and issuers alike from inflation risk. Inflation indexed bonds would be a fundamental innovation in . financial markets, providing benefits to investors, the Treasury, and policymakers. Despite the potential benefits, the . Treasury has never issued indexed bonds. In fact, only a handful of industrialized countries, including the United Kingdom and Canada, have issued inflation indexed government bonds. This article discusses the benefits of inflation indexed Treasury bonds and points out. | Benefits and Limitations of Inflation Indexed Treasury Bonds By Pu Shen In recent years members of Congress and academia have repeatedly urged the . Treasury to issue some portion of its debt in the form of inflation indexed bonds. With an indexed bond the interest and maturity value are adjusted by the rate of inflation over the life of the bond. Because the cash flow of an indexed bond is adjusted for inflation the bond s real value does not vary with inflation protecting investors and issuers alike from inflation risk. Inflation indexed bonds would be a fundamental innovation in . financial markets providing benefits to investors the Treasury and policymakers. Despite the potential benefits the . Treasury has never issued indexed bonds. In fact only a handful of industrialized countries including the United Kingdom and Canada have issued inflation indexed government bonds. This article discusses the benefits of inflation indexed Treasury bonds and points out some oftheir limitations. The first section shows how indexed bonds differ from conventional bonds. The second section discusses why investors the Treasury and policymakers would benefit from adding indexed Pu Shen is an economist at the Federal Reserve Bank of Kansas City. Corey Koenig an assistant economist at the bank helped prepare the article. bonds to the spectrum of . Treasury debt instruments. The third section discusses some of the technical limitations of the bonds. The article concludes that if carefully designed inflation indexed Treasury bonds are likely to be beneficial. WHAT ARE INFLATION INDEXED BONDS An inflation indexed bond protects both investors and issuers from the uncertainty of inflation over the life of the Like conventional bonds indexed bonds pay interest at fixed intervals and return the principal at maturity. The fundamental difference is that while conventional bonds make payments that are fixed in nominal dollars and thus are called nominal bonds indexed .

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