Structure
Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate. The relationship between coupon payments, breakeven inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
For some bonds, such as the Series I Savings Bonds (U.S.), the interest rate is adjusted according to inflation.
For other bonds, such as in the case of TIPS, the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the annual coupon of the bond were 5% and the underlying principal of the bond were 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units.
Read more about this topic: Inflation-indexed Bond
Famous quotes containing the word structure:
“Man is more disposed to domination than freedom; and a structure of dominion not only gladdens the eye of the master who rears and protects it, but even its servants are uplifted by the thought that they are members of a whole, which rises high above the life and strength of single generations.”
—Karl Wilhelm Von Humboldt (1767–1835)
“Who says that fictions only and false hair
Become a verse? Is there in truth no beauty?
Is all good structure in a winding stair?
May no lines pass, except they do their duty
Not to a true, but painted chair?”
—George Herbert (1593–1633)
“Vashtar: So it’s finished. A structure to house one man and the greatest treasure of all time.
Senta: And a structure that will last for all time.
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Senta: Sire, will he not be remembered?
Vashtar: Yes, he’ll be remembered. The pyramid’ll keep his memory alive. In that he built better than he knew.”
—William Faulkner (1897–1962)