Hi, I don't understand the solution to part ii if the above question I thought an inflation swap was when fixed payments were exchanged for variable payments based on the rate of inflation in the solution it seems to be expected exchanged for actual with allowance for future inflation On a separate issue can u confirm the difference between corporate bonds and commercial papers please. Are bonds secured but papers not? Thanks for all your help
April 2008 q3 - I think the swap is future inflation for a fixed amount. The inflation linked amount going from the bank to the life office is the rental payment. So the bank pay inflation linked rent to the life office but at the same time swap a fixed payment stream for inflation linked payments and so they end up effectively paying the bank a fixed rental income (as the inflation payments cancel out). Good question - Is the difference between corporate bonds and commercial paper maybe that commercial paper has shorter term and is issued in larger denominations?
