Inflation indexed bonds?

Question

I am not sure of the particulars of inflation indexed bonds...

where does the inflation go? into the face value?

More to the point - i am thinking of buying a 0-coupon inflation indexed bond, ( http://www.bonds.is/MarketOverview.aspx?catID=1631&Type=Bond&OrderBookId=11028) but the price is higher than par value, how can the yeild be more than 5% if this is the case? for any yeild, doesn't the price need to be lower than 100 basis points?

Answer 1

The bond is face value and the inflation is placed on the yield. There is generally a very small guarenteed yield with an inflation indexed yield. The yield can also fluctuate if the bond is sold for more or less than the worth of the bond at that time.