Linked Bond Cash Flows and Yields

Index-Linked Bond Cash Flows and Yields 

As noted above, index bonds differ in whether their principal payments or their coupons or both are linked to the index. When the principal alone is linked, each coupon and the final principal payment are determined by the ratio of two values of the relevant index. U.S. TIPS coupon payments, for instance, are calculated using an accretion factor based on the ratio between two CPI-U levels, defined by equation (12.1). 

CPIm- = the CPI level three months before the bond s redemption date 

CPIsenimtnt tid ate the consumer price index levels recorded 

Dividing this difference by the number of days between January 1 and February 1 gives 

And multiplying the result by the number of days in January before the reference date gives 

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