President approves inflation-linked government bond issue

By decree on digitalization of the insurance market, the President approved the proposal of the Ministry of Finance to issue such securities starting from July 1, 2022.

The agency was also instructed to develop proposals for the direction of insurance premiums from voluntary pension insurance and types of long-term (five or more) life insurance for the purchase of government bonds linked to inflation for investment purposes.

What it is

Inflation-indexed securities (inflation-linked securities or real-income securities) provide an investor with protection against price increases.

Bonds could depreciate strongly amid high inflation, given the long maturity and low coupon payments.

In order to smooth out the negative consequences of rising prices, ensure a positive return on investment and thereby attract investors, the state issues special series of securities with protection against inflation. In Russia, for example, such securities began to be issued in 2015 (federal loan bonds – OFZ-IN), in the USA – since 1997 (Treasury Inflation-Protected Securities – TIPS).

The main idea of ​​”anti-inflationary” securities is as follows: since money is constantly depreciating due to inflation, then by the end of the bonds circulation period, the initial par value at the time of maturity of the security does not correspond at all to its purchasing power at the time of issue.

And the coupons, which are paid for by the denomination constantly “losing weight” from inflation, will also decrease each time in real terms. This means that it is necessary to index the “body” of the security by the amount of real inflation.

The most important thing about these bonds is that with a fixed coupon rate, the face value of the securities is constantly indexed in accordance with the consumer price index. That is, if the face value of the bond is 100 soums, and inflation has grown by 3%, the face value of the bond will rise to 103 soums.

Accordingly, the higher the denomination, the larger the coupon will be in monetary terms because it will be calculated from 103 soums.

 

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