In the Budget Review of 17 February 1999, the Department of Finance indicated that the South African Government was investigating the introduction of a bond which would pay interest indexed to an appropriate measure of inflation. If South Africa were to issue index linked bonds, it would become one of a relatively small group of countries in the world to do so. Experiences with the introduction of index linked bonds in these countries, which include the United Kingdom, United States of America, Canada, New Zealand, Australia, Sweden, Argentina, Brazil, Israel, Poland and Mexico, have varied quite significantly. For example, in the United Kingdom consumer price inflation decreased from 11,9 per cent in 1981, the year of first issue, to 4,6 per cent two years later. In the case of Argentina consumer price inflation fell from 61,2 per cent in 1973, the year of issue, to 23,5 per cent in 1974 before it accelerated sharply to 182,9 per cent in 1975. The issuing of index linked bonds in most countries resulted from the sharp increase in the cost of government debt due to high rates of inflation in the 1970s. These high rates of inflation were inter alia fuelled by high public spending in the United States at the time of the Vietnam War, the ensuing devaluation of the dollar and the first oil crisis and all its repercussions – all against the background of inflation-tolerant policies in many of the G10 countries. In the 1980s the expansionary fiscal policies in some of these countries accelerated the growth in the public debt. As a result, real interest rates increased quite sharply. The high interest rates added further to public spending and in some cases developed into a persistent increase in public debt in relation to gross domestic product. Consequently, treasuries began searching for ways to manage public debt more effectively by, for example, issuing index linked bonds. This note explains the mechanics of such bonds and how information about inflation expectations can be extracted once such bonds are issued. This follows the indication recently given by the Governor of the Reserve Bank that the market prices of such bonds would provide valuable information about inflation expectations to the Reserve Bank.