Inflation-Linked Bonds by Hand: Index Ratios, Adjusted Principal, Real Yields, Breakeven Inflation & Deflation Floors

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Look up the index of the months three and two before a settlement date, count the days of that month and interpolate the reference index for the exact day.
• Divide the reference index on six dates by the base index, round the index ratio, grow the principal with it and turn the total uplift into an average yearly inflation rate.
• Compute six coupons of a holding from the real coupon and the index ratio, total them, separate the inflation uplift and work out the final payment at maturity.
• Price a linker from its real cash flows at a real yield, back out the real yield from a quoted price with IRR, turn the quoted price into a settlement amount with the index ratio and measure how the price reacts to a higher real yield.
• Compute breakeven inflation along a fictional yield curve, decide for each maturity which bond wins if a forecast comes true, measure the real return of the nominal bond and count the maturities where the linker wins.
• Compute the index ratio and adjusted principal at maturity in four price scenarios, apply the deflation floor to the redemption, measure what the floor is worth and see that the final coupon is not protected.
• Build the linker's cash flows in a low, base and high inflation path with POWER, compute its return in money with IRR and compare it with a nominal bond in every scenario.
• Project next year's income of a small bond mix, convert it into today's money, measure the linkers' share and how much extra income an inflation shock brings, and chart nominal against real income.