Index-linked bonds are securities whose return includes a component that is determined by the future level of a predetermined index, for example; CPI or inflation. There are two main types of inflation linked bonds issued in Australia: Capital indexed bonds (CIB) and Inflation indexed annuities (IIA). CIBs pay a pre-determined coupon based on a capitalising principal amount where the capitalisation is a function of inflation At maturity the investor receives the capitalised face value. An IIA is an annuity structure where each periodic payment includes a coupon and principal component where the principal is adjusted for inflation The Commonwealth Government, state governments and some corporations have issued inflation linked bonds in Australia ILBs are also known as inflation indexed bonds or CPI bonds.
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