Inflation-Indexed Bonds (IIBs) are designed to protect investors from the erosion of purchasing power due to inflation. The principal amount is adjusted based on the inflation rate, ensuring that the real return to the investor remains stable. This feature allows governments to potentially issue these bonds at lower real coupon rates compared to conventional bonds because the inflation risk is transferred to the government, which can manage it through its fiscal and monetary policies. However, the interest received and capital gains on IIBs are generally taxable in India, similar to other fixed-income securities, making statement 3 incorrect.