CoachAn index-linked bond (a linker) is a bond whose principal, and so each coupon, is scaled by the growth of a consumer price index since the bond’s dated date. The scaling uses the reference index: the price index of a given day as the bond’s rules define it from the published monthly values. The ratio of the reference index on a day to its value on the dated date is the index ratio. A deflation floor is a promise that the principal repaid at maturity is never less than the original face value, whatever the index has done.
Exemples
Example 11.2 (An index ratio)
Take an illustrative ten-year TIPS dated 15 January 2022, with a 0.125% coupon. Its reference index on that day interpolates between the October 2021 index, 276.589, and November’s, 277.948: . On 15 August 2022 it interpolates between May 2022, 292.296, and June, 296.311: 294.10922. The index ratio is , so USD 100 million of face value is then USD 106.099 million of principal, and the coupon paid on 15 July, at an index ratio of 1.04814, was USD 65 509.