In index-linked bonds, which statement is true?

• A. The coupon is inflation-indexed, but the redemption amount is fixed
• B. The coupon rate is fixed, and the redemption amount remains fixed
• C. Both the coupon and the redemption amount are increased by inflation over their lifetimes
• D. Inflation has no effect on coupon or redemption

Answer: (C)

Index-linked bonds are designed to move with inflation. The principal (the amount repaid at maturity) is adjusted for inflation, so the redemption payment you receive at the end isn’t fixed in nominal terms. The coupon, while often set at a fixed rate, is typically applied to that inflation-adjusted principal, meaning the actual coupon payments rise as inflation increases. Because both the amount you repay at the end and the periodic interest payments track the inflation index, the correct statement is that both the coupon and the redemption amount are increased by inflation over their lifetimes.