Inflation-linked bonds (ILBs) are government or corporate bonds whose principal and/or interest payments are tied to the inflation rate. When inflation rises, both the bond's principal value and interest payments increase, protecting investors against inflation erosion.
How they work: The bond's principal is periodically adjusted for inflation. Interest payments are calculated by applying a fixed coupon rate to this adjusted principal. At maturity, the investor receives the inflation-adjusted principal back.
The main benefits are inflation protection and guaranteed real returns, which help with portfolio diversification. The most well-known example is US TIPS (Treasury Inflation-Protected Securities).
Bangladesh doesn't yet have inflation-linked bonds. Bangladesh Bank issues conventional fixed-rate treasury bonds. However, given rising inflation, there may be future discussions about introducing ILBs.