Real Return Bonds
Real Return Bonds (RRB) is a type of government bonds issued by the government of Canada or the governments of the provinces of Canada, the main feature of which is the yield paid to investors, adjusted for inflation.
This type of government bonds has the following features:
1. The par value of such securities is 1000 CAD;
2. The accumulated coupon yield on bonds can be paid once every six months, or when a bond is sold or when it falls due. In both cases, the nominal value is adjusted by an amount equal to the consumer price index (CPI);
3. Compensation for inflation on this type of bonds, like interest, is taxable. If inflation rises, any additional amounts included in interest income will be added to the bond’s adjusted base price. On the other hand, lower inflation would result in a deduction from income and from the bond’s adjusted cost base.
Advantages of RRB:
1. Guaranteed payment of interest and principal by the Government of Canada;
2. Guaranteed investor protection against inflation;
3. Reduced risk of reinvestment - the nominal value of the principal debt increases in accordance with the rate of inflation due to the accrual of inflation compensation.
Disadvantages of this type of bonds:
1. Market price volatility - due to changes in real yields and fluctuations in the consumer price index, long-term bonds are most susceptible to market price fluctuations.