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Forward real yield

Forward real yield trades and forward BEI (inflation curve) trades. [Pg.278]

Implied forward real yield and BEI difference trades between two markets. [Pg.278]

An important aspect of trading these bonds is using expectations of future monthly changes in linking indices, provided by economists, to calculate expected forward real yields and expected forward break-even inflation. Making assumptions about future price index levels allows these forward aggregates to be calculated in the same way that forward nominal bond prices and yields are worked out. [Pg.278]

The drawbacks of each of these approaches are apparent. A rather more valid and sound approach is to constmct a term structure of the real interest rates, which would indicate, in exactly the same way that the conventional forward rate curve does for nominal rates, the market s expectatimis rat future inflation rates. In countries where there are liquid markets in both conventional and inflation-indexed bmids, we can observe a nominal and a real yield curve. It then becomes possible to estimate both a conventional and a real term structure using these allows us to create pairs of hypothetical conventional and indexed bonds that have identical maturity dates, for any point on the term structure. We could then apply the break-even approach to any pair of bonds... [Pg.122]

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. [Pg.123]

From this average inflation curve, we can select specific inflation rates for each index-linked bond in our sample. The real yields on each indexed bond are then recalculated using these new inflation assumptions. From these yields the real forward curve is calculated, enabling us to produce a new estimate of the inflation term stmcture. This process is repeated until there is consistency between the inflation term stmcture used to estimate the real yields and that produced by Equation (6.5). [Pg.126]

So, we have argued, the economics of supply and demand make the risk premium a slippery concept. Bond mathematics now makes matters worse. This new aspect centres on the issue of convexity. We know that a forward curve of implied future short-term nominal rates can be derived from the nominal government bond curve. In principle, a forward curve of implied future short-term real rates can be similarly derived from the inflation-linked bond real yield curve. These two curves, taken together, should imply a future path of inflation, if we can set aside the risk premium for the moment. Unfortunately, that is not the case. [Pg.263]

Using equation 14.16, we can build a forward inflation curve provided we have the values of the index at present, as well as a set of zero-coupon bond prices of required credit quality. Following standard yield curve analysis, we may build the term structure from forward rates and therefore imply the real yield curve, or alternatively we may construct the real curve and project the forward rates. However, if we are using inflation swaps for the market price inputs, the former method is preferred because IL swaps are usually quoted in terms of a forward index value. [Pg.322]

The real potential V is scanned from the configuration xo 3W along each qx° for 10 points both in the forward and backward directions. We found that a step size of 0.1 A is usually a reasonable choice to yield W within a few percent of the exact. [Pg.92]

This is a useful and informative situation, and solvolytic experiments of this kind have a particular value if an absolute value for the second-order rate constant, ki, for the reaction of the trap with the intermediate is known. In that case, an absolute value of the first-order rate constant, k2, for the conversion of the intermediate into the solvent-derived product maybe obtained, and hence an estimate of its lifetime under the reaction conditions. Measurements yielding values less than the vibrational limit (1.7 x 10 13 s at 25°C) indicate clearly that I has no real lifetime and hence is not a viable intermediate, and an alternative mechanism is required. For non-solvolytic reactions in a solution where the forward reaction of the reactive intermediate (other than with T) is bimolecular/second order, its lifetime will be diffusion controlled and the limit is likely to be closer to 10 10 s (though dependent upon the concentration of its co-reactant). [Pg.244]

Using the modified Waggoner method described in Chapter 5, the nominal spot yield curve for the gUt market in July 1999 is shown in Figure 6.5. The real term stmcture is also shown, which enables us to draw the implied forward inflation expectation curve, which is simply the difference between the first two curves. [Pg.126]

It is possible to infer market expectations about the level of real interest rates going forward by observing yields in government index-linked bonds, which trade in a number of countries including the US and UK. The market s view on the future level of interest rates may also be inferred from the shape and level of the current yield curve. Again from chapter 6, we saw that the slope of the yield curve also has an information content. There is more than one way to interpret any given slope however, and this debate is still open. [Pg.251]

A more accurate approach m ht be the one used to price interest tate swaps to calculate the present values of future cash flows usit discount tates determined by the markets view on where interest rates will be at those points. These expected rates ate known as forward interest rates. Forward rates, however, are implied, and a YTM derived using them is as speculative as one calculated using the conventional formula. This is because the real market interest rate at any time is invariably different from the one implied earlier in the forward markets. So a YTM calculation made using forward rates would not equal the yield actually realized either. The zero-coupon rate, it will be demonstrated later, is the true interest tate for any term to maturity. Still, despite the limitations imposed by its underlying assumptions, the YTM is the main measure of return used in the markets. [Pg.26]


See other pages where Forward real yield is mentioned: [Pg.124]    [Pg.126]    [Pg.172]    [Pg.629]    [Pg.237]    [Pg.180]    [Pg.1334]    [Pg.123]    [Pg.274]    [Pg.521]    [Pg.9]    [Pg.118]    [Pg.123]    [Pg.214]    [Pg.56]    [Pg.10]    [Pg.301]    [Pg.5133]    [Pg.3645]    [Pg.702]    [Pg.76]    [Pg.149]    [Pg.162]    [Pg.238]    [Pg.843]    [Pg.156]   


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