In what way do inflation-linked bonds benefit a portfolio?

In what way do inflation-linked bonds benefit a portfolio?

• A. They guarantee fixed interest rates
• B. They provide protection against inflation
• C. They are exclusively short-term investments
• D. They decrease interest payments during inflation

Answer: (B)

Inflation-linked bonds are designed specifically to protect investors from the purchasing power erosion that occurs during inflationary periods. When inflation rises, the principal value of these bonds increases, which in turn adjusts the interest payments to reflect higher prices. This means that investors receive increasing interest payments that keep pace with inflation. Including inflation-linked bonds in a portfolio can help maintain the real value of investments, ensuring that the returns are not diminished by rising prices. This feature is particularly valuable for investors who are concerned about the effects of inflation on their assets and income over time. Consequently, these bonds help to stabilize the overall portfolio returns in an inflationary environment, enhancing long-term investment performance.

Inflation-linked bonds are designed specifically to protect investors from the purchasing power erosion that occurs during inflationary periods. When inflation rises, the principal value of these bonds increases, which in turn adjusts the interest payments to reflect higher prices. This means that investors receive increasing interest payments that keep pace with inflation.

Including inflation-linked bonds in a portfolio can help maintain the real value of investments, ensuring that the returns are not diminished by rising prices. This feature is particularly valuable for investors who are concerned about the effects of inflation on their assets and income over time. Consequently, these bonds help to stabilize the overall portfolio returns in an inflationary environment, enhancing long-term investment performance.