Inflation-linked bonds - commonly known as linkers - are becoming an increasingly popular tool for investors' strategic hedging requirements, and more big issuers are expected to enter this $450bn market in the near future. Most inflation-linked bonds are principal-indexed, that is their principal is increased by the change in inflation over a period, generally using the consumer price index (GPI) or its equivalent as an inflation proxy. As the principal amount increases with inflation, the interest rate is applied to this increased amount, causing the interest payment to increase over time. At maturity, the principal is repaid at the inflated amount, so an investor gains full inflation protection as long as the inflation rate equals the CPI.
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