Inflation-indexed bonds (also known as inflation-linked bonds or
colloquially as linkers) are bonds where the principal is
indexed to inflation. They are thus designed to cut out the
inflation risk of an investment. The first known inflation-
indexed bond was issued by the Massachusetts Bay Company in
1780. The market has grown dramatically since the British
government began issuing inflation-linked Gilts in 1981. As of
2008, government-issued inflation-linked bonds comprise over
$1.5 trillion of the international debt market. The inflation-
linked market primarily consists of sovereign bonds, with
privately issued inflation-linked bonds constituting a small
portion of the market. Inflation-indexed bonds pay a periodic
coupon that is equal to the product of the inflation index and
the nominal coupon rate. The relationship between coupon
payments, breakeven inflation and real interest rates is given
by the Fisher equation. A rise in coupon payments is a result of
an increase in inflation expectations, real rates