Index linked bonds and their applicability in Malta

Abstract

[...] Objectives: The objective of this dissertation is to study the nature of ILBs, their main advantages and disadvantages and to determine their suitability in Malta. The key research questions that this dissertation aims to solve are: 1. How do ILBs function? 2. What are the advantages and disadvantages of ILBs for the issuer, investor and policymaker? 3. How reliable is the Retail Price Index (RPI) as a benchmark for ILBs? 4. How far are ILBs applicable to Malta?

Limitations: This dissertation is based on information available up to 31st December 1997. An outline of the calculation of coupon payments and the redemption payment of Capital Indexed Bonds will be given, but this study will be limited as to the detail on the calculation of other types of ILBs. The detail as to the calculation of the inflation expectations and all the related formulae will not be dealt with in this dissertation. The taxation implications of these investments are also beyond the scope of this study. Dissertation overview: as shown in figure 1.1 on page 6, the study is structured as follows. The review of literature is divided into two chapters: - Chapter 2 deals with nature, characteristics and mechanism of ILBs. It also highlights the differences between conventional bonds and ILBs. - Chapter 3 poses the advantages and disadvantages of ILBs to the issuer, investors and policymakers. The methodology used for the research will be dealt with in Chapter 4. The research process and the structure of the various interviews held will be explained. Chapter 5 analyses the inflationary situation in Malta, the mechanism and composition of the RPI, its main limitations and their effect on indexed bonds. Chapter 6 discussed and applies the findings obtained from the interviews held. At the outset the chapter delineates the major investment preferences of the local investors and the possible reasons for their choices. The chapter then proceeds to view and discuss the opinions of the interviewees about the various questions that were asked during the Institutional Survey. Chapter 7 offers a summary and some concluding remarks including a number of recommendations.