Why does adding inflation linked bonds in a pension asset increase duration? I thought a similar asset, floating rate bonds, have very low duration, so inflation linked bonds should decrease duration?
Think about Macaulay duration. Inflation-linked bonds typically have a par value that increases with inflation. That means that the last payment on the bond is increasing, adding more weight to the longest time-to-receipt. That should increase the Macaulay duration, which means that it will increase the modified duration.
superb , you are real magician…do some magic that we all pass with flying colors this time itself 
…Can’t deal with this horror anymore
So with inflation-linked bonds it is not the coupon that is changing based on the inflation? The coupon is the same, but the par value is modified?
Have never seen an inflation linked bond in real life.
For TIPS (in the US), the coupon _ rate _ is fixed. The par value changes with the CPI, so the coupon amount changes as well: it’s a fixed percentage of a changing par amount.
There may be inflation protected bonds for which the coupon rate changes with inflation, but the par value does not. I don’t know. But CFA Institute focuses on TIPS.
OK, thanks!
Bonds with floating-rate coupons protect interest income from inflation because the reference rate should adjust for inflation. The principal payment at maturity is unadjusted for inflation. Inflation-linked bonds provide investors with valuable inflation hedging benefits by paying a return that is directly linked to an index of consumer prices and adjusting the principal for inflation. There are several different structures for inflation-linked bonds, such as zero-coupon bonds with the inflation adjustment made to the principal payment, and capital-indexed bonds where a fixed coupon rate is applied to a principal amount that is adjusted for inflation throughout the bond’s life.