B
bij_30
Member
Inflation indexed bond pay a periodic coupon that is a product of the inflation index and the nominal coupon rate. Generally the inflation index is calculated with some time lag.
For example - chapter 11 has example on page 6 as:
Consider a 3½% coupon stock issued in February 2000 and redeemed in February 2005. The coupon payments are made each year and are linked to an inflation index with a one-year time lag. The index values each February from 1999 to 2005 are given in the table below.
Year 1999 2000 2001 2002 2003 2004 2005
Index 540 562 584 607 632 657 788
The base month for indexation is February 1999 because of the time lag.
Question: Is the base month always specified in the exam or do we need to assume one?
The coupon payments per £100 nominal are calculated as coupon rate * (past years index / base index). If there was no time lag would the coupon payment be coupon rate * (current year index/ base index)
While calculating real value of the payments why are we considering year 2000 as the base? Is it because the stock was issued in 2000?
Thanks in advance!!