What is a Commodity-Backed Bond?
Commodity-backed bonds are bonds with a connection to the current price of the underlying commodity that is used to guarantee the value of the investment. This is different from the practice with other types of bonds, where the value of the bond is determined by the fixed dollar amount offered at the time the bond is purchased. Generally, a commodity-backed bond is understood to function as a hedge against the possible swing of the economy into a period of inflation. Sometimes referred to as a gold bond, the commodity-backed bond has the potential to generate more of a return than most other types of bonds. The key to the rate of return has to do with the current market value of the commodities that back the bond. In the event that the commodity performs at a higher level than anticipated at the time the bond is purchased, the investor will receive higher interest payments and/or a higher repayment on the principle investment. Because the commodity-backed bond does carry more potential
