- Although the exact level of inflation cannot be predicted, inflation-linked bonds are one of the safest ways to store savings and protect capital from a decline in the purchasing power of money.
- As an investment, they are useful only when inflation is rising, but not hyperinflation. If not, the profit will be much less than in the case of fixed-rate bonds
- Bonds of this type also have a longer freezing time than in the case of variable rate variants with a fixed interest rate of 3 months (equal interest) or 2 years.
Inflation-related bonds They are issued serially, mainly from the state treasury. Moreover, by private companies and financial institutions, this alternative is less common. It should be noted that the available versions include 4 and 10 year versions and those intended for those who use the 500+ program, i.e. 6 and 12 year versions. Will this alternative to debt securities always provide the savings from inflation?
Bonds – what is this?
Conventional (unindexed) bonds are debt securities in which the issuer becomes indebted to the creditor or bondholder and thus undertakes to perform a specified performance. In practice, the state treasury often owes a debt to investors, and after a specified period of time, exactly on the maturity date, returns the face value of financial instruments.
How are inflation-linked bonds different from conventional bonds?
At the outset, it is important to emphasize what indexing is. This means that the value of the amount resulting from the interest accrued to the bond holder makes the price list index reliable. The index in these bonds indicates the level of the inflation rate. The interest rate is always floating, but with the exception of Treasury bonds – in the first year it is fixed, and from the second year only inflation is added to the margin.
An additional difference specifically relates to bonds indexed for 6, 10 and 12 year terms. In their case, there is no regular coupon return. Interest is capitalized, which means more profits. How to calculate the profit value in such a case? You must first calculate a fixed interest rate of PLN 100, and from the second year of investment – a margin on the result of this calculation, that is, the mentioned PLN 100 plus the interest rate.
The price of indexed debt securities depends on the rate of inflation, and therefore also on macroeconomic characteristics. Moreover, the interest rate on them is variable, which means that the amount to be paid varies over time. In turn, interest on repayment is calculated in two ways:
- Based on the inflation rate in the period prior to the interest period – known interest;
- Based on the inflation rate in the interest period – the interest rate is unknown.
In contrast, the price of a standard bond is the result of a combination of supply and demand. They are mainly bought and sold by large investment funds, which decide to buy them after analyzing their cash flows (possible amounts that you will receive from the issuer) and profitability (return on investment).
Treasury inflation-linked bonds
In the case of securities issued by a civil legal entity representing the state, the Ministry of Finance is responsible for informing it of the possibility of purchasing new securities. Such a situation occurred in May 2022, when the Ministry of Finance issued a statement that the sale of new emissions would begin on June 1, 2022 and announced that it was submitting the following models:
- 4 years (5.5% *);
- 6-year family (5.7%*) – only for 500+ beneficiaries;
- 10 years (5.75% *);
- Family of 12 (6% *) – only for people with more than 500 benefits.
* In each case, the interest rate is applied to the first annual interest period.
Inflation-related bonds For 4 or 10 years it can be purchased by natural persons (resident and non-resident), associations and other social and professional organizations, as well as institutions registered in the court registry.
How and where to buy inflation-linked bonds?
There are several options for purchasing inflation-linked bonds. you can do that In person at the facility (a branch of PKO Bank Polski or customer service points of the PKO BP brokerage house). If you want to buy securities in person, it is better to check all the available points of sale on the website: implacjeskarbowe.pl.
by phone On the following numbers: 801310210 or (+48) 81535 66 55 (telephone service is open from Monday to Friday from 8:00 to 17:00, excluding public holidays). Furthermore it Online On the website kup.obligacjeskarbowe.pl and via the Inteligo account at inteligo.pl.
Advantages and disadvantages of inflation-linked bonds
Despite the fact that the exact level of inflation cannot be predicted and all the data presented relate to the past, Inflation-related bonds It is still one of the safest ways to store savings and insure capital against the decline in the purchasing power of money.
It should be borne in mind that as an investment it is profitable only when inflation rises, but not hyperinflation. If not, the profit will be much less than in the case of fixed rate bonds.
Bonds of this type also have a longer freezing time than in the case of variable rate variants with a fixed interest rate of 3 months (equal interest) or 2 years. However, in this case, the advantage is inflation protection, and not the short duration.
Inflation-linked bonds – what should you remember?
It is important to know that in the event of hyperinflation, indexed bonds will not be perfect. However, compared to its alternatives (such as deposits or low-interest stocks), it compares favorably with investment risk. It should also be remembered that when deciding on such a form of securities, if they were not redeemed earlier, the invested funds will be frozen for at least 4 years.
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