Alternative Designs for Inflation-Indexed Bonds: P-Linkers vs. C-Linkers
Donald J. Smith
Boston University - Department of Finance & Economics
March 1, 2009
Boston U. School of Management Research Paper No. 2009-15
This paper analyzes the before-tax and after-tax cash flows for two stylized types of inflation-indexed bonds-"P-Linkers" and "C-Linkers." P-Linkers, like U.S. TIPS, have a fixed interest rate and link the accrued principal to changes in the consumer price index. C-Linkers are floating-rate notes that adjust the coupon interest rate for inflation while the principal is held constant. While both types of linkers provide protection from unexpected inflation, they differ significantly in terms of the amount and timing of cash flows, how and when cash flows are taxed, as well as in their price sensitivities to changes in real rates (i.e., their duration statistics). These differences impact investor strategies, especially those at aim to match the durations of assets and liabilities, and decisions about holding the inflation-indexed bonds in a tax-deferred structure like a retirement plan.
Number of Pages in PDF File: 34
JEL Classification: E31, G11working papers series
Date posted: March 19, 2009 ; Last revised: March 27, 2012
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