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Definition: Inflation Indexed Security
Inflation Indexed Security is a type of security that provides a hedge against inflation. It takes into account inflation rate as well as deflation rate while paying the interest and also consider inflation while paying the maturity. Thus it protects the investors from losing the money or the saving due to inflation. They give periodic coupons just like a normal bond but they adjust their coupon payment and maturity amount by inflation this way the investor does not lose on their savings and thus get a real return. Real returns are defined as returns that are already adjusted with the inflation rate. Since they provide risk coverage so thus the coupon rate is less than what is actually given to normal securities. Thus the par value of the security rises with the increase in the inflation. To get full benefit from the Inflation indexed security it is important to keep the security till maturity period.
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