Inflation indexes bonds are thr bonds where the principal amount is adjusted according to the inflation or deflation. If we look from the buyer’s perspective, inflation indexed bonds are more secured as compared to any other type of bond.
Given the security these bonds offer, the payout or coupon rate is lower than other high risk notes, higher the risk higher the returns and vice versa.
Let’s understand this through an example, let’s say John buys a inflation indexed bond of $1000 with coupon rate of 10% annual payment, now let’s assume inflation raises up by 4% the next year which will decrease the value of bond but in case of inflation bond, John will get extra 2% on his principal amount and his his usual coupon on the new principal amount.
Coming to Zero coupon bond, is a bond in which the face value is repaid at the time of maturity, zero coupon bonds doesn’t pay any interest but instead are traded at deep discount, rendering profit at the time of maturity. The difference between the issue price and face value of the bond is the only profit, bondholders will get through zero coupon bond.
Let’s understand this by an example, let’s assume josh, buys a zero coupon bond at $800 with face value of $1000 , now josh will not receive any coupon throughout the life of his bond, but instead will receive $1000 at maturity, the only profit he’ll get will be of $200 .
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