An Inflation Term Structure

Where a liquid market in indexed bonds exists across a reasonable maturity term structure, it is possible to construct a term structure of inflation rates. In essence, the process involves constructing the nominal and real interest rate term structures, then using them to infer an inflation term structure. This, in turn, can be used to calculate a forward expected inflation rate for any term or a forward inflation curve in the same way that a forward interest rate curve is constructed. 

Federal Reserve uses an iterative technique to construct a term structure of expected inflation rates. First, the nominal interest rate term structure is constructed using a version of the model described in Waggoner (1997) and discussed in James and Webber (2000). An initial assumed inflation term structure is then used to infer a term structure of real interest rates. This assumed inflation curve is usually set at a flat 3 or 5 percent. The real interest rate curve is then 

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Observing the trading patterns of a liquid market in inflation-indexed bonds enables analysts to draw conclusions about nominal versus real interest rates and to construct an inflation term structure. Such analysis is problematic, since conventional and indexed bonds typically differ considerably in liquidity. Nevertheless, as explained above, it is usually possible to infer market estimates of inflation expectations from the difference between the yields of the two types of bonds. 

An inflation term structure is a necessary prerequisite to the pricing of inflation derivatives. It is constructed using the same principles we discussed in Chapters 3 and 4. Previously, to construct this curve we would have used IL bond prices as the set of market yields used as inputs to the curve. Now, however, we can also use the prices of IL derivatives. As with other markets, the derivative prices are often preferred to cash prices for two reasons one, we can use a continuous set of prices rather than have to rely on available bond maturities, and two, there is usually greater liquidity in the OTC market. 

From market observation we know that index-linked bonds can experience considerable volatility in prices, similar to conventional bonds, and therefore, there is an element of volatility in the real yield return of these bonds. Traditional economic theory states that the level of real interest rates is cmistant however, in practice they do vary over time. In addition, there are liquidity and supply and demand factors that affect the market prices of index-linked bonds. In this chapter, we present analytical techniques that can be applied to index-linked bonds, the duration and volatility of index-linked bonds and the concept of the real interest rate term structure. Moreover, we show the valuation of inflation-linked bonds with different cash flow structures and embedded options. 

Using the prices of index-linked bonds, it is possible to estimate a term structure of real interest rates. The estimation of such a curve provides a real interest counterpart to the nominal term structure that was discussed in the previous chapters. More important it enables us to derive a real forward rate curve. This enables the real yield curve to be used as a somce of information on the market s view of expected future inflation. In the United Kingdom market, there are two factors that present problems for the estimation of the real term structure the first is the 8-month lag between the indexation uplift and the cash flow date, and the second is the fact that there are fewer index-linked bonds in issue, compared to the number of conventional bonds. The indexation lag means that in the absence of a measure of expected inflation, real bond yields are dependent to some extent on the assumed rate of future inflatiOTi. The second factor presents practical problems in curve estimation in December 1999 there were only 11 index-linked gilts in existence, and this is not sufficient for most models. Neither of these factors presents an insurmountable problem however, and it is stiU possible to estimate a real term structure. 

Kramer, W., 2013. An introduction to inflation-linked bonds. Lazard Asset Management. McCulloch, L, 1971. Measuring the term structure of interest rates. 1. Bus. XLIV, 19-31. McCulloch, L, 1975. The tax-adjusted yield curve. 1. Financ. 30 (3), 811-830. 

This chapter provides an overview of the structure and function of mechanical ventilators. Mechanical ventilators, which are often also called respirators, are used to artificially ventilate the lungs of patients who are unable to breathe naturally from the atmosphere. In almost 105 years of development, many mechanical ventilators with different designs have been manufactured (MacIntyre and Branson, 2009). Very early devices used bellows that were manually operated to inflate the lungs. Today s respirators employ an array of sophisticated components, such as microprocessors, fast-response servo valves, and precision transducers to mechanically ventilate the incapacitated patients. Large varieties of ventilators are now available for short-term treatment of acute respiratory dysfunction as well as long-term therapy for chronic respiratory conditions. 

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