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Part 4
is currently the largest inflation-linked index bond in the world. TIPS are similar to
traditional treasury bonds in that the coupon rate is fixed and the coupon is paid every
six months. The difference between the two is that the principal of traditional treasury
bonds is a fixed amount, while the maturity of TIPS varies with the inflation index. The
coupon rate of TIPS is a pure real rate of return, which changes the actual coupon yield
return of TIPS will not be affected by inflation risk. Interestingly, the real rate of interest
of traditional treasury bonds is often different with that of TIPS. When the inflation
index rises, the real interest rates of traditional treasury bonds will fall, while there is
no change in the real interest rates of TIPS. The anti-inflation characteristic of TIPS
often gives investors good protection when inflation rises, so that the real yield is equal
to or even higher than that of traditional treasury bonds (Carlstrom & Fuerst, 2004). It
should be emphasized that TIPS cannot completely avoid inflation risk in practice for
the reason that there is a time lag in calculating the inflation index.
TIPS can be regarded as a risk-free fixed income product, which can not only fight
inflation but also bring a stable yield. For investors, there are three main advantages.
The first is to ensure the purchasing power of investors' principal and interest in the
future. Second, it increases the diversity of the portfolio, reduces the risk of the portfolio
and increases the total return. Thirdly, inflation-protected bonds have relatively low
volatility.
There are also two benefits for the country. One is to increase government financing
channels and financing convenience. It is also one of the main means of financing by
the US government. Second, it enhances the ability of the central bank to operate the
open market and increases the space for the Federal Reserve to operate the open market.
Part 5
Part 7
This excerpt reflects the current situation of government bonds with negative interest
rates. In fact, negative yield bonds have become one of the fastest growing asset classes
in the world, accounting for about a quarter of the European government bond market.
Germany, Austria, Finland and Spain all issued short-term bonds at negative yields.
However, Switzerland's 10-year Treasury bonds did pioneer when investors lent money
for a long period of time and even gave interest to the government.
Negative interest rates are a real response to deflationary expectations. The negative
interest rate of 10-year bonds issued by Switzerland is more a nominal negative interest
rate, which is not directly equivalent to the real interest rate. The real interest rate also
depends on the price index. As part 2 analysis shows, if inflation is less than nominal
interest rates, the real return on Swiss government bonds is likely to be positive.