Valuation of a New Class of Commodity-Linked Bonds with Partial Indexation Adjustments
19 Pages Posted: 30 May 2009
Date Written: May, 29 2009
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
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