If the CPI inflation in September was 10%, the minimum coupon on an inflation-indexed bond
will be 11.5%.
By contrast, a strategy of investing in a variable-maturity inflation-indexed bond
would exhibit zero volatility at each horizon; that is, it would overlap with the horizontal axis on Figure 1.
The inflation-indexed bond
, which carries a coupon of 4.375%, is part of a liability management transaction aimed at strengthening the sovereign's external debt profile.
While this may partly have reflected concern about an increased risk of deflation occurring, it is also likely to have been due partly to heightened uncertainty more generally and poor liquidity conditions in the inflation-indexed bond
An inflation-indexed bond
that does not qualify for the coupon bond method (e.g., it is issued at a discount) is subject to the more complex discount bond method.
Using a simple econometric model to proxy for expectations about current and future short-term rates, the authors succeed in replicating some of the observed changes in long-term inflation-indexed bond
(6) Interestingly, the State Electricity Commission of Victoria issued the first inflation-indexed bond
in Australia in 1983, before the federal government began to issue such securities.
This regulatory symmetry works well when the rules are applied to either a traditional or an inflation-indexed bond
subject to a discount (whether arising on original issue or in a subsequent trade).
Yield = Real Yield + Risk Premium
Treasury inflation-indexed bond
, which provides protection against inflation by offering a constant real return for the life of the bond.
The real price of the one-period inflation-indexed bond
can therefore be expressed as
ABSTRACT This paper explores the history of inflation-indexed bond
markets in the United States and the United Kingdom.