By Deacon M., Derry A., Mirfendereski D.
The worldwide marketplace for inflation-indexed securities has ballooned in recent times, and this pattern is determined to proceed. This publication examines the reason at the back of issuance and funding judgements, and info the problems dealing with a person who designs listed securities, illustrating them anyplace attainable with real examples from the overseas capital markets. specifically, an in depth overview of listed debt markets during the global is equipped - together with for the 1st time, a entire and constant set of money circulate and price-yield equations for the tools already in life within the significant bond markets - forming an incredible reference for these already skilled within the box, in addition to practitioners and lecturers drawing close the topic for the 1st time.The ebook additionally offers specific perception into the improvement of inflation-indexed spinoff items, and the analytical instruments required to worth such tools.
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Extra info for Inflation-indexed Securities. Bonds, Swaps and Other Derivatives
Example text
These are non-marketable retail savings instruments. 3 Gilt-edged securities (marketable government bonds). 6 Inflation-indexed Securities savings. The bonds are usually indexed to a broad measure of prices, typically a domestic Consumer Price Index (CPI), but other ‘‘inflation’’ indices (such as wholesale prices, average earnings and the GDP deflator) have been used. Although they take a variety of forms the capital-indexed structure has become the most widely utilised, with all income and principal payments adjusted for inflation.
4 21 Indexed Annuity Bond (IAB) IABs consist of a fixed annuity payment and a variable element to compensate for inflation. Several public corporations in Australia have issued IABs. 5 illustrate the cash flow profile of an annual coupon 10-year IAB under a hypothetical inflationary path and a 4% real interest rate assumption.
Cash flows linked to a pan-European index should serve better, although in the long run, if inflation within each of the member states converges as economic theory might suggest, this might be less of an issue. But there is clearly a risk that the ‘‘long run’’ may be beyond the investor’s horizon and that realised cash flows linked to a pan-European CPI do not adequately match the inflation experienced by the investor in their home country. This is an example of where the derivatives market can play an important part, by developing contracts to meet the investor’s precise need.