Nominal debt

The relationship between inflation-linked and nominal debt provides a market-based reading of inflationary expectations, although several... 

Since 1998 the growth in the market has slowed. This was to be expected given that the programme was maturing and the SNDO did not feel it necessary to pump the market with supply just for the sake of liquidity. The inflation rate fell sharply and this lowered the cost of funding the inflation-linked debt. However, it did not prevent the difference between nominal and real rates falling sharply, thus reducing the cost effectiveness of inflation-linked versus nominal debt from the Debt... 

Note Hypothesis Nonnal financing conditions equivalent to those on coal and gas generation projects with 12 percent ROE and 8 percent interest rate on debt in nominal and after tax. 

We have sketched out a couple of reasons why governments issue index-linked bonds already. We also said how the removal of inflation risk is valuable for the borrower, as it is for the investor, and earlier we described how in some countries rampant inflation resulted in a complete loss of investor confidence in nominal government debt, requiring the creation of an inflation-linked bond market out of necessity. However, there are other arguments why governments should issue linkers, and the reasons already given need to be added to, expanded upon and broken down into different subarguments. 

The example of Japan, in the recent past, is one of a country that has suffered from unexpected disinflation and now deflation. This has resulted in an unanticipated real wealth transfer from issuers of nominal bonds to investors, resulting in a windfall loss to the government and windfall gains for investors. Had it issued inflation-linked JGBs, this would have tempered the escalation in Japan s public debt/GDP ratio a little. The unique economic structures and circumstances might not make Japan a particularly persuasive comparison to apply to other economies, the intention is simply to illustrate the risks of the unexpected. 

The first linker to be issued was a 20-year bond with a zero-coupon structure (No. 3001, 0% 2014). A selection of the eight Primary Dealers in the nominal market took responsibility to quote two-way prices for the new bond. The Debt Office held five common price auctions from April to June, which saw a face value of SEK16 billion being offered to the market. But demand for much higher real yields from the market meant that only SEK6.7 billion was allotted. 

The repo market in government securities comprises T-bills known as Letras, bonds of between three and five years maturity (Bonos) and bonds of 10-15 years maturity (Obligaciones). Repo in Letras was introduced first, in 1987. At the start of 2002 there was approximately 251.3 billion nominal of government debt ontstanding repo volnme was approximately 141 billion per month. ... 

For longer-dated debt instruments investors have the a choice of the very long-term notional 30-year, 6% coupon Euro-Buxl contract which covers cash market bonds with a matnrity of between 20 and 30.5 years, or the notional 10-year, 6% coupon Enro-Bnnd contract which covers the 8.5-10.5 years maturity section of the yield curve. The nominal size for each contract is 100,000 both have a minimum allowable price movement (tick) of 1 basis point, which is valued at 10, and a contract cycle of March, Jnne, September, and December, of which the three nearest-to-delivery, snccessive contracts will be available for trading. 

A bond s term to maturity is crucial because it indicates the period during which the bondholder can expect to receive coupon payments and the number of years before the principal is paid back. The principal of a bond—also referred to as its redemption value, maturity value, par value, or face value—is the amount that the issuer threes to repay the bondholder on the maturity, or redemption, date, when the debt ceases to exist and the issuer redeems the bond. The coupon rate, or nominal rate, is the interest rate that the issuer agrees to pay during the bond s term. The annual interest payment made to bondholders is the bond s coupon. The cash amount of the coupon is the coupon rate multiplied by the principal of the bond. For example, a bond with a coupon rate of 8 percent and a principal of 1,000 will pay an annual cash amount of 80. 

If 6% or 8% is used as a nominal average interest rate on the construction cost investment, and the period in which this is to be amortized involves a significant fraction of the lifetime of the plant, an average annual contribution to paying of the construction cost debt can be figures. For simplification, it will be assumed that the amortization will be structured so that it involves equal payments by the owner over a period of years. For simplification, let s assume 30 years for the amortization period, on a nuclear plant which is expected to have a lifetime of 40-60 years. 

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