Inflation Linked Bonds (ILB) – An Inflation linked Bond (ILB) is a bond which provides protection against inflation, since principal amount of such bonds is indexed to inflation. The coupon payment for ILB is lesser than the fixed rate bonds with a comparable maturity. But in case of ILB, as the principle amount grows, the payment increases with inflation.
All ILBs are linked to Inflation, however the precise provision vary around the world. Most often, the outstanding principle is adjusted in response to changes in the Consumer Price Index (on daily basis). In general, the principal and interest payments on an inflation-linked bond rise with any substantial increases in the consumer prices so that the bonds cash flow increases in line with a rise in inflation.