Capital-indexed bonds

Index-linked gilts, like all other linkers covered in this chapter, are known as capital indexed bonds, where the income and principal are adjusted for changes in a consumer price index, subject to a lag. In the United Kingdom, the index is the RPI and the lag is eight months. The market trades on a clean price basis, with the quoted price a cash price (not a real price), including inflation accretion. 

Capital indexation. Capital-indexed bonds have been issued in the United States, Australia, Canada, New Zealand, and the United Kingdom. Their coupon rates are specified in real terms, meaning that the coupon paid guarantees the real amount. For example, if the coupon is stated as 2 percent, what the buyer really gets is 2 percent after adjustment for inflation. Each period, this rate is applied to the inflation-adjusted principal amount to produce the coupon payment amount. At maturity, the principal repayment is the product of the bond s nominal value times the cumulative change in the index since issuance. Compared with interest-indexed bonds of similar maturity, these bonds have longer durations and lower reinvestment risk. 

There are five basic methods of linking the cash flows from a bond to an inflation index interest indexation, capital indexation, zero-coupon indexation, annuity indexation, and current pay. Which method is chosen depends on the requirements of the issuers and of the investors they wish to attract. The principal factors considered in making this choice, according to Deacon and Derry (1998), are duration, reinvestment risk, and tax treatment. 

Indexed bonds real yields in other markets are also a factor in investors decisions. The integration of markets around the world in the past twenty years has increased global capital mobility, enabling investors to shun markets where inflation is high. Over time, therefore, expected returns should be roughly equal around the world, at least in developed and liquid markets, and so should real yields. Accordingly, index-linked bonds should have roughly similar real yields, whatever market they are traded in. 

As the limestone must be ground to about 90 % less than 40 pm, it is important that the operating and capital costs of the grinding equipment should not be excessive. The Bond Work Index test [12.7] was developed as a measure of the ease with which a substance can be ground. The value of the index for many limestones is between 8 and 10 kW hr/short ton. 

In rising stock markets, beta > 1 benefits from the index appreciation because the probability of rising stock prices and, therefore, to convert the bond will increase. Therefore, a greater beta determines a greater cost of capital and consequently a lower present value of cash flows. This means that the target price of the underlying asset will be lower, reducing the conversion premium. 

EXHIBIT 8.1 Market Value Composition of the Barclays Capital Global Inflation-Linked Bond Index ( billion)... 

Most market participants are familiar with the concept of duration and its effect on the returns from fixed income instruments. However, the difference in the calculations of duration of a bond and a portfolio is worth noting. Most index and analytics providers (including Barclays Capital) calculate index and portfolio duration as the market value weighted duration of individual bonds that constitute the index or portfolio. The other measure, known as cash flow duration, calculates the duration based on the cash flow of the entire portfolio, using the internal rate of return (IRR) of those cash flows and then measuring the sensitivity of portfolio value to change in that IRR. 

Hence, bonds in contrast to stocks nsnally have a fixed maturity, their duration decreases with the course of time. Bonds with a shorter dnration are less sensitive to changes in the capital markets reflected by interest rate changes. Applying historical bond data in the Markowitz optimization framework thns can lead to biased results. As the indices ntilized here have an npper and lower matnrity bonnd for the bonds inclnded, the indexes dnrations and maturities are almost constant. Thus, the bias in historical index returns caused by aging secnrities should be small and can be neglected. 

Part Two discusses selected instruments traded in the debt capital markets. The products—hybrid secmities, mortgage-backed bonds, and callable bonds—have been chosen to give the reader an idea of the variety available in the market. Also described are index-linked bonds and a strucmred product known as a collateralized debt obligation (CDO). Some of the techniques for analyzing these more complex products are explained. 

Inflation-indexed derivatives, also known as inflation-linked derivatives or inflation derivatives, have become widely traded instruments in the capital markets in a relatively short space of time. They are traded generally by the same desks in investment banks that trade inflation-linked sovereign bonds, which use these instruments for hedging as well as to meet the requirements of clients such as hedge funds, pension funds, and corporates. They are a natural development of the inflation-linked bond market. 

The unimolecular dynamics of H-C-C -> H -f C=C was studied on eleven different surfaces by adjusting the parameters in the analytic function. The surfaces are identified by two indices first by a roman numeral I-V and second by a capital letter A-D. The roman numerals are used to indicate different types of coupling between the CH stretching and HCC bending motion. The second index denotes variation in the coupling between CH and CC bonds. This coupling controls the CH bond length at the dissociation barrier and... 

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