Final answer:
Governments offer indexed bonds to minimize the impact of inflation on bondholders, maintain investor confidence, and attract a broader investor base, by ensuring the real value of investments is maintained.
Step-by-step explanation:
If a government gains from unexpected inflation when it borrows, it might nonetheless choose to offer indexed bonds to minimize the impact of inflation on bondholders. While it's true that governments can benefit from repaying debt with inflated dollars, thereby reducing the real interest rate on their past borrowing, offering indexed bonds is a strategy to maintain investor confidence and attract a broader base of investors. Indexed bonds adjust the interest payments based on the rate of inflation, ensuring that investors maintain the real value of their investment regardless of inflation levels.
From the investor's perspective, especially those concerned with long-term planning such as retirees, indexed bonds offer a guarantee that their return will exceed inflation, making these bonds a more secure investment compared to traditional fixed-rate bonds. Thus, by issuing indexed bonds, the government can demonstrate fiscal responsibility and provide a safe option for investors looking to mitigate the risks associated with inflation.