What is a capital indexed bond?

Simply, CIBs are a bond whose base payment rises and falls with the Consumer Price Index (CPI). CIBs have their capital, or the principal amount of the bond, indexed (usually quarterly) with the revised capital amount due for repayment at maturity.

How does an RPI swap work?

In an inflation swap, one party pays a fixed rate cash flow on a notional principal amount while the other party pays a floating rate linked to an inflation index, such as the Consumer Price Index (CPI). The party paying the floating rate pays the inflation-adjusted rate multiplied by the notional principal amount.

How does a CPI swap work?

CPI swaps are a type of interest-rate swap in which the fixed payment is based on the current, expected rate of inflation and the variable payment is based on the actual rate of inflation. The actual rate of inflation is measured by the cumulative change in the headline CPI, which includes food and energy.

What is ILS swap?

An ILS is a derivative contract that involves an exchange of a payment defined in terms of a fixed rate on a notional amount (the “fixed leg” of the swap) for a payment defined in terms of the realised inflation rate over a predetermined horizon on that same notional amount.

Which are capital indexed bonds issued by government?

Out of several variants of Inflation Indexed Bonds, the Capital Indexed Bonds (CIB) is the most popular and widely issued debt instrument internationally. In India also one variant of CIB (viz., 6 per cent Capital Indexed Bond 2002) was issued for the first time on December 29, 1997.

What is the 5 year 5 year inflation swap?

Measures the expected inflation rate (on average) over the five-year period that begins five years from today. The current 5 Year 5 Year inflation expectation rate as of May 24, 2022 is 2.23.

Are inflation swaps OTC?

In effect, the ZCIS is a bilateral contract used to provide a hedge against inflation. While payment is typically exchanged at the end of the swap term, a buyer may choose to sell the swap on the over-the-counter (OTC) market prior to maturity.

How do you hedge inflation swap?

The party seeking to hedge inflation risk pays a floating inflation-linked cash flow in exchange for receiving a fixed rate cash flow. The counterparty speculating an increase in future inflation seeks to increase inflation exposure by paying a fixed rate for floating.

What is swap and types of swaps?

A swap is a derivative contract between two parties that involves the exchange of pre-agreed cash flows of two financial instruments. The cash flows are usually determined using the notional principal amount (a predetermined nominal value). Each stream of the cash flows is called a “leg.”

What is overnight index swap rate?

An Overnight Index Swap (OIS) is an interest rate swap agreement where a fixed rate is swapped against a pre-determined published index of a daily overnight reference rate for example SONIA (GBP) or EONIA (EUR) for an agreed period.

What is call option in bonds?

A bond call option is a contract that gives the holder the right to buy a bond by a particular date for a predetermined price. A secondary market buyer of a bond call option is expecting a decline in interest rates and an increase in bond prices.