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http://ssrn.com/abstract=1364404
 
 

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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

Abstract:     
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, G11

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Date posted: March 19, 2009 ; Last revised: March 27, 2012

Suggested Citation

Smith, Donald J., Alternative Designs for Inflation-Indexed Bonds: P-Linkers vs. C-Linkers (March 1, 2009). Boston U. School of Management Research Paper No. 2009-15. Available at SSRN: http://ssrn.com/abstract=1364404 or http://dx.doi.org/10.2139/ssrn.1364404

Contact Information

Donald J. Smith (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-2037 (Phone)
617-353-6667 (Fax)
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