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The formula is a simple linear interpolation, with the slope equal to the monthly inflation of two previous months. Using CPIs t-3 and t-2 ensures that a calculation is possible on any trading
The index factor is used in order to adjust the cash flows of an inflation-linked bond for inflation. The index factor expresses the change in the Swedish consumer price index (CPI), i.e. the change in the price level between two dates. The index factor is calculated as the ratio between
Inflation-linked bonds (ILBs) or linkers are fixed income securities whose principal and coupons are linked to inflation2 through a price index (Krämer, 2017). They are designed to eliminate the risk of unexpected inflation or to hedge against long-run inflation risk to the holders of the bonds.
• The all-in price of the inflation indexed bond is obtained by multiplying the rounded all-in price from the BESA bond formula by the unrounded Index Ratio, and the result is rounded to 5 decimal places. • The accrued interest is calculated by multiplying the rounded accrued interest obtained from the
Example: A 10% coupon bond has ten years to maturity and $1,000 face value. If the required rate of return for this bond is 10%, how much does this bond sell for? Method 1: Use tables A.1 and A.2. par bond (i.e., the bond is sold at its par). Method 2: Financial calculator Inputs: n=10, i =10, PMT=100, FV=1,000 press the PV key, PV=-1,000.
incorporates expected inflation and a measure of real return and reflects the term structure, with bonds of different maturities carrying different interest rates. The default premia varies across time, depending in large part on the health of the economy and investors' risk preferences.
Inflation expectations implied by the market can be deduced by comparing the yields of nominal Treasury bonds with the yields of similar-maturity TIPS.
