Inflation Indexed Bonds :-
In inflation-indexed bonds, principal & coupon amounts are adjusted to compensate the investor for inflation. In other words, if the inflation increase in the market then the Inflation-indexed bonds holder coupon amt. as well as its principal amt. will also increase respective to the increase in inflation.
Generally, Investors seeking safe returns with little to no risk will often hold inflation-indexed bonds.
-> Let’s understand IIB’s work with help of an example :-
- If the annual coupon is 6 percent and the principal is $ 100, the investor will be paid $ 6 a year.
- Now, If the inflation index rises 10 percent, the principal will become $ 110.
- The coupon will remain 6 percent, resulting in an interest payment of $110 x 6 percent = $ 6.6
If we talk about the trend, In recent years, the issue of inflation-indexed bonds has gained a lot of attraction in emerging markets and developing economies, because the value of money depreciates rapidly in a high-inflation environment.
Zero coupon Bonds:-
In this type of bond there are no intermediate coupon payments or say no interest payments( no coupon payments) to the investor and since there is no coupon payment here. so, to attract investors to invest in this type of bond, they are issued at discount value & redeem at par value. ( always issued at discount & redeemed at par).
Let us understand this also with the help of an example:-
If a bond par value is $1000 then it will be issued at $900 and at the expiry, it will be redeemed at the par value i.e., $ 1000. So, the difference b/w par value and the Issued value that is, in this case, is $ 100 will be a kind of interest for the investor.
Generally co. issues these because they believe that they might not be able to raise cash inflows for the coming few years but they still need capital for the like-new factory is being constructed etc.) so instead of paying intermediate payments periodically they will prefer to pay the lump sum amount at the end.
So Bonds like IIB and Zero-coupon bonds help companies to run smoothly by providing a variety of options to raise capital from so that these companies can meet their long-term capital needs and run their business whereas, Investors also get more options to invest in according to their interest and earn returns on that.
Peepalfarm. 