Inflation‑Linked Bonds (ILBs) are securities designed to neutralise the effect of inflation on the rate of return for investors. As such, inflation-linked bonds have a fixed real return profile. Inflation-Linked Bonds are primarily issued by sovereign governments or institutions guaranteed by governments.
An Inflation-Linked Bond will typically add the inflation rate to the principal in accordance with an official inflation benchmark, such as the Consumer Price Index. As the principal rises with inflation, down-payments and interest payments will rise accordingly as the duration stays constant.
Real Rate Inflation-Indexed Mortgages (RIMs) can protect markets from inflation and allow borrowers to get loans with constant loan payments in real terms. Index-Linked Mortgages allocate risks more appropriately and can help to stabilize the economy, as market participants may have expectations about real and natural interest rates.
Index-Linked Mortgages have generally been introduced and adopted in markets in order to fight rampant inflation. They were introduced in Denmark in 1982 and in Iceland in 1979 after periods of high inflation.