Investment in Index-Linked Bonds
Index-linked bonds are also known as structured bonds. This product is more popular in immature investment markets, where investors are not sufficiently educated. Diversity of index-linked bonds can be very high, and such products may be created according to client needs and market conditions as easy as any other derivative.
Index-linked bonds are constructed from two investment instruments: traditional bonds and options. Despite the fact that these products seem very attractive: low risk and the opportunity to make money - the reality is usually different, because the index-linked bond buyer gets two contrast investments: traditional bond (very low risk) and option (extremely high risk). Contrasts always cost more, and investor even pays additional fees for construction of this investing instrument.
Also many investors do not pay attention to index-linked bond issuer risk. Such bonds shouldn’t be compared to risk-free bonds, because an index-linked bond issuer can also default.
Investment in index-linked bonds may be an easy, but not the most efficient choice.