Coupon payments

At the same time, the investor enters in the swap contract, paying fixed cash flows equal to the coupon payment and receiving a fixed spread over the interbank rate, that is the asset-swap spread. Figure 1.1 shows the asset-swap mechanism. 

The same coupon payment (3.250% for HERIM and 3.125% for TKAAV, annual frequency payment) ... 

The bond price equation is usually given in terms of discount factors, with the present value of each coupon payment and the maturity payment being the product of multiplying them by their relevant discount factors. This allows us to set the price equation as shown by Equation (5.2),... 

To obtain the price of an inflation-linked bond, it is necessary to determine the value of coupon payments and principal repayment. Inflation-linked bonds can be structured with a different cash flow indexation. As noted above, duration, tax treatment and reinvestment risk, are the main factors that affect the instrument design. For instance, index-aimuity bmids that give to the investor a fixed annuity payment and a variable element to compensate the inflation have the shortest duration and the highest reinvestment risk of aU inflation-linked bonds. Conversely, inflation-linked zero-coupon bonds have the highest duration of all inflation-linked bonds and do not have reinvestment risk. In addition, also the tax treatment affects the cash flow structure. In some bond markets, the inflation adjustment on the principal is treated as current income for tax purpose, while in other markets it is not. 

The price of an inflation-linked bmid is determined as the present value of future coupon payments and principal at maturity. Like a conventional bond, the valuation depends on the cash flow structure. We can have three main cash flow structures of index-linked bonds. 

In a deflationary environment a conventional bond performs very well, while an inflation-linked bond gives negative returns. Some of inflation-linked bonds include deflation protection.In practice, in the event of deflation, the bondholder will receive at maturity the par value although the redemption value is less than 100. Therefore, the bondholder will obtain at least the par value. Note that the deflation floor applies to the redemption value only leaving coupon payments exposed to the deflation risk. 

Determining the value of coupon payments and principal repayment ... 

After having determined the binomial inflation rate tree, we calculate the value of coupon payments and principal repayment. Each coupon is linked to the inflation rate in the binomial inflation rate tree and the value is obtained as the present value of coupon payments. 

Finally, the value of an inflation-linked bond is determined as the sum of the value of coupon payments, principal and put option at time 0. The value is given by Equation (6.22) ... 

After the first coupon payment, Barro attributes a double weight on the periodical inflation rate before the coupon payment. For instance, in the case of perfect indexation, the second coupon payment should be adjusted in the following way ... 

Considering the example shown in Table A1 of a hypothetical bond with coupons and principal linked to the inflation. We assume a 5-year inflation-linked bond with a 2% annual coupon payment. The expected cash flows, coupons and principal, are discounted with a discount rate of 3%. The valuation is performed by the following steps. 

The coupon payments are determined as percentage on the par value and they are adjusted to the expected inflation rate. For instance, at first payment date, the coupon is calculated as follows ... 

The second coupon payment is calculated as the compounded inflation rate at time 2 as follows ... 

As made for coupon payments, also the redemption value is adjusted for inflation. The nominal redemption value is equal to 110.18 and is given by ... 

The author defines the total value of the firm v(V) as the sum of firm value V, tax benefit from coupon payments TB(V) less the value of bankruptcy costs BC(F). The value is given by Equation (8.23) ... 

Determining the Value of an Option-Free Bond The fair value of an option-free bond is the sum of the present values of aU its cash flows in terms of coupon payments and principal repayment. The bond value is given by Equation (9.5) ... 

The valuation of a conventional bond can be performed also using a binomial tree. On maturity, the bond must be priced at par value plus the semiannual coupon payment equal to 2.75. Therefore, the value of a conventional IxHid at maturity tio must be equal to 102.75. The value of the bond in other nodes prior to maturity is calculated using the semi-aimual discount rate of 4.02%. For instance, at node the pricing is given by Equation (9.6) ... 

Consider the case of Tesla Motors Inc., the bond has semi-annual coupon payments. In this case, the present value is determined by using the spot rate for each payment date in which the international yield curve has been implemented. 

A fixed-rate bond pays fixed coupons during the bond s life known with certainty. Conversely, a floating-rate note ox floater pays variable coupons linked to a reference rate. This makes the coupon payments uncertain. The main pim-pose of this debt instrument is to hedge the risk of rising interest rates. Although the financial crisis and liquidity provided by central banks have decreased the level of interest rates, they will at some point of course rise in future years. 

Unpredictable cashflows While in fixed-rate securities the coupon payments are known with certainty, with floaters we cannot predict futiue cash flows ... 

The coupon payment is determined by two main components, the reference rate... 

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