With reference to the Indian economy, what are the advantages of ‘’Inflation-Indexed Bonds (IIBs)?

  1. Government can reduce the coupon rates on its borrowing by way of IIBs
  2. IIBs provide protection to the investors from uncertainty regarding inflation
  3. The interest received as well as capital gains on IIBs are not taxable

Which of the statements given above are correct?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Explanation:

With reference to the Indian economy, the advantages of Inflation-Indexed Bonds (IIBs) are as follows:

  1. Government can reduce the coupon rates on its borrowing by way of IIBs: By issuing bonds that are indexed to inflation, the government can reduce its borrowing costs and the coupon payments it needs to make to bondholders because the principal and interest on these bonds are adjusted for inflation. This means that if inflation rises, the government pays more interest on the bonds but also receives more on principal repayment.
  2. IIBs provide protection to the investors from uncertainty regarding inflation: These bonds protect the bondholder from inflation by adjusting the principal and interest payments to an index of price changes. This ensures that the bond’s purchasing power is maintained, providing a hedge against inflation for the investor.

The third statement is incorrect. Extant tax provisions are applicable on interest payment and capital gains on IIBs.

Therefore, the correct answer is “1 and 2 only.”

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