If the CPI inflation in September was 10%, the minimum coupon on an inflation-indexed bond
will be 11.
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.
We can estimate the expected inflation component of nominal interest rates by calculating the 'break-even inflation rates', which are the difference between the nominal yield on a conventional government bond and the real yield on an inflation-indexed bond
of the same maturity.
An inflation-indexed bond
that does not qualify for the coupon bond method (e.
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).
Consider a hypothetical $1,000-par inflation-indexed bond
with a 3 percent coupon rate.
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.