How do inflation-indexed bonds help investors?

Inflation-indexed bonds are designed specifically to protect investors from the eroding effects of inflation. These bonds adjust both the principal amount and the interest payments based on changes in inflation, as measured by an index like the Consumer Price Index (CPI).

When inflation rises, the principal value of the bond increases, which means that the bond's interest payments, typically calculated as a percentage of the principal, also rise. As a result, investors receive higher interest payments in periods of higher inflation, helping to maintain their purchasing power. This adjustment mechanism provides a safeguard against inflation, making these bonds particularly appealing in environments where inflation is a concern.

In contrast, other options do not accurately describe the function of inflation-indexed bonds. For instance, a choice that states they provide fixed interest rates regardless of inflation overlooks the primary feature of these bonds, which is their dynamic adjustment to inflation rates. Similarly, while some bonds may offer guarantees on returns or be linked to stock market performance, those characteristics do not apply to inflation-indexed bonds, which focus solely on adjusting for inflation to protect investor value.