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Consider the following statements in regard to 'Inflation Index bonds'?
(1) Investment in these bonds is more risky as these bonds increase the inflation risk attached to the investment.
(2) It is better financial instrument compared to gold to hedge the risk rising out of volatile economy.
Which of the statements given above is are correct?
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- 1 only
- 2 only
- both 1 and 2
- Neither 1 nor 2
Correct Option: D
Inflation-indexed bonds are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an attached to the investment, These bonds thus decrease the inflation risk attached to the investment. Moreover these bonds are a better hedge than gold in a volatile economy as gold does.
