Valuation of a New Class of Commodity-Linked Bonds with Partial Indexation Adjustments

19 Pages Posted: 30 May 2009

See all articles by Thomas H. Kirschenmann

Thomas H. Kirschenmann

University of Texas at Austin - Institute for Computational Engineering and Sciences

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: May, 29 2009

Abstract

The issuance of debt instruments with indexation of coupon payments to consumer or commodity prices has occurred with increasing frequency in both the developed and developing world. Such issuance has frequently been made by sovereign or near-sovereign issuers, and occasionally replicated through derivative structures provided by investment bankers. In this paper we provide a valuation for the recent issuance of a new type of commodity-linked bond, wherein the indexation is partial, reflecting the growth if any in the underlying price index since the time of the last price adjustment. We explore the circumstances under which the bond's rate of return dominates that of the traditional indexed instrument. We demonstrate such a bond fails to provide the constant, fixed "real" rate of return typically guaranteed by a CPI-linked instrument such as TIPS.

Keywords: Commodity-linked bonds, derivative structures, indexation, real rates

Suggested Citation

Kirschenmann, Thomas H. and Ronn, Ehud I., Valuation of a New Class of Commodity-Linked Bonds with Partial Indexation Adjustments (May, 29 2009). Available at SSRN: https://ssrn.com/abstract=1411780 or http://dx.doi.org/10.2139/ssrn.1411780

Thomas H. Kirschenmann

University of Texas at Austin - Institute for Computational Engineering and Sciences ( email )

1 University Station C0200
Austin, TX 78712
United States
325-374-8296 (Phone)

Ehud I. Ronn (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

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