Chapter 6

Advanced Analytics for Index-Linked Bonds

Abstract

This chapter provides an advanced overview to index-linked securities, including inflation-indexed securities such as TIPS issued by the U.S. government and index-linked gilts issued by the UK government. Basic concepts of bond purpose and design are described in summary, followed by a detailed look at inflation-linked bond yield analysis. This then enables us to look at the concept of the inflation term structure, including the break-even analysis.

The second half of the chapter illustrated the valuation of different I-L bonds. In addition, it shows an innovative pricing model to estimate the price of I-L bonds with the deflation floor using a binomial-tree model. Important concepts ...

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