Three types of bonds: Part 3 - Inflation linked bonds

This is the third and final article in this series. Combined, the articles explain that bonds are appropriate investments across all economic cycles. There are three different bonds that work best under different economic conditions: fixed rate, floating rate and inflation linked

By Angus Knight · 4 Mar 2015

By Angus Knight ·
4 Mar 2015

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This is the third and final article in this series. Combined, the articles explain that bonds are appropriate investments across all economic cycles.

There are three different bonds that work best under different economic conditions:

Fixed rate
Floating rate
Inflation linked

An inflation linked bond (ILB) is the only investment that provides a direct hedge against inflation and therefore should feature in most investment portfolios.

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Frequently Asked Questions about this Article…

What are the three types of bonds discussed in the article?

The article discusses three types of bonds: fixed rate, floating rate, and inflation-linked bonds. Each type is suited to different economic conditions.

Why should investors consider inflation-linked bonds?

Inflation-linked bonds are unique because they provide a direct hedge against inflation, making them a valuable addition to most investment portfolios.

How do inflation-linked bonds protect against inflation?

Inflation-linked bonds adjust their interest payments based on inflation rates, ensuring that the investor's purchasing power is maintained over time.

Are inflation-linked bonds suitable for all economic cycles?

Yes, inflation-linked bonds are designed to perform well in various economic cycles by protecting against inflation, which can occur in different economic conditions.

What makes inflation-linked bonds different from fixed and floating rate bonds?

Unlike fixed and floating rate bonds, inflation-linked bonds adjust their returns based on inflation, providing a safeguard against the eroding effects of rising prices.

Should inflation-linked bonds be a part of every investment portfolio?

The article suggests that inflation-linked bonds should feature in most investment portfolios due to their ability to hedge against inflation.

Can inflation-linked bonds help maintain purchasing power?

Yes, by adjusting for inflation, these bonds help maintain the investor's purchasing power, ensuring that returns are not diminished by rising prices.

What is the main benefit of including inflation-linked bonds in an investment strategy?

The main benefit is their ability to provide a direct hedge against inflation, which can help stabilize and protect the value of an investment portfolio over time.