Indexed Bond - Indexed bonds are bonds that make payments according to a specific index or the price of a specified commodity. An example of indexed bonds is the Treasury Inflation Protected Securities (TIPS) which have par values that are tied to the general level of prices. By tying the par value of these bonds to the Consumer Price Index, the coupon payments and final par value payment fluctuate in direct proportion to the Consumer Price Index. To illustrate, let's assume that par value is $1000 and the coupon rate is 4%. If inflation rose 4 percent then the par value of the bond would be $1040 and therefore the coupon payment would be $41.60 = .04 X $1040.

If investors are living off of fixed income securities such as bonds, they may want to invest in indexed bonds so that their purchasing power and therefore their living standards do not change since they have eliminated the risk of price inflation.
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