Pricing Growth-Indexed Bonds

26 Pages Posted: 3 Mar 2006

See all articles by Marcos Chamon

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Paolo Mauro

International Monetary Fund (IMF)

Date Written: November 2005

Abstract

Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries` fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.

Keywords: Emerging markets, GDP-indexed bonds, Monte-Carlo simulation

JEL Classification: F33, F34, F36, G13, G15

Suggested Citation

Chamon, Marcos and Mauro, Paolo, Pricing Growth-Indexed Bonds (November 2005). IMF Working Paper No. 05/216, Available at SSRN: https://ssrn.com/abstract=888085

Marcos Chamon (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

Paolo Mauro

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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