Home  Journals  Financial Analytics: Science and Experience  32(314) - 2016 August

Evaluating the economic efficiency of linkers: The methodology overview

Vol. 9, Iss. 32, AUGUST 2016

Article PDF Version

Received: 10 August 2016

Received in revised form: 20 August 2016

Accepted: 26 August 2016

Available online: 30 August 2016

Subject Heading: FINANCIAL INSTRUMENTS

JEL Classification: G11, G28, H63, H74

Pages: 40-50

Importance Nowadays, financial regulatory authorities use various methods to attract financing. Index-linked bonds are one of possible solutions. The article discusses the methodology developed by the UK Debt Management Office that assesses the effectiveness of index-linked bond issue.
Objectives The study aims to consider the specifics of index-linked bonds and their distribution, to examine the methodology, its benefits and limitations, to assess the feasibility of its application for structured assessment of the bonds’ issue efficiency.
Methods The study employs the concept of break-even inflation rate, which is taken as an indexation tool for an artificial bond. The difference in cash flows from the newly created bond and a ‘linker’ is an indicator of efficiency.
Results The analysis enables to evaluate the efficiency of the index-linked bond issuance, to choose the best maturity and the volume of issuance, considering different inflation forecasts. The analysis enables federal and municipal authorities to evaluate the efficiency of index-linked bonds, which is necessary for decision-making on debt financing.
Conclusions The model is a useful tool for index-linked bonds efficiency evaluation. Nevertheless, it is vital to apply it with other methods organized in a system. The model has some limitations and requires high quality forecasts.

Keywords: finance, bond, linkers, efficiency, break-even inflation rate

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