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Help with inflation index etc

L

Leah

Made first post
Hi,

I am becoming a bit confused with using index rates. For a question with a price index of
2005 149.2
2006 151.4
2007 161.5
2008 171.3
To then work out coupon payments for 2007 the markscheme says to do 161.5/ 149.2
In previous examples I have looked at some of them have done( starting value)/ now rather than the other way round. How do I know which way round to do it? I seem to always end up with the numerator as the denominator and vice versa.
 
Hi Leah,

If you are index-linking cashflows (increasing them in line with inflation) it's index @ payment date / index @ base date (although there may be a lag applied if the index values would not be known on payment date.

If you are working out real cashflows (ie stripping inflation out of cashflows to put everything on a consistent basis) then it's the reverse: index @ base date / index @ payment date.

Joe
 
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