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A bond's principal and interest payments are LINKED TO AN UNLEVERAGED INFLATION INDEX in the currency of issuance, with principal protected. Under Ind AS 109's SPPI test, this bond:
APASSES the SPPI test — inflation indexing simply resets the time value of money to a current level (real interest), consistent with a basic lending arrangement
BCannot be classified until inflation actually moves
CFAILS the SPPI test — any indexing to a macro variable breaks SPPI
DFAILS — only fixed-rate instruments meet SPPI
Answer & Solution
Correct answer: A. PASSES the SPPI test — inflation indexing simply resets the time value of money to a current level (real interest), consistent with a basic lending arrangement
Para B4.1.13 — UNLEVERAGED inflation indexing in the issuance currency is consistent with the time value of money (real interest). Cash flows pass SPPI. If the indexing were LEVERAGED (e.g., 2× inflation) or to a different variable (equity index, debtor's net income), the SPPI test would fail.
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