index-linked market
English translation: See explanation
| 10:48 Aug 26, 2004 |
| English language (monolingual) [PRO] Bus/Financial - Finance (general) | |||||||
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|  Selected response from: Aoife Kennedy United Kingdom Local time: 22:15 | ||||||
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| SUMMARY OF ALL EXPLANATIONS PROVIDED | ||||
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| 4 +1 | Additional explanation (don't select this as an answer) |
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| 3 +1 | See explanation |
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| 4 -1 | Stock price index |
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| Discussion entries: 1 | |
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Answers
21 mins confidence: 
peer agreement (net): +1
peer agreement (net): +1See explanation Explanation: My understanding is that it is a market for securities which is linked to an index such as the retail-price index. This is often so that price variations are in line with inflation. Index linked Definition The coupling of salaries and pensions etc to the retail price index in order to make sure that the income from them keeps pace with inflation. |
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Grading comment
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1 hr confidence: peer agreement (net): -1
peer agreement (net): -1Stock price index Explanation: On the one hand are the government bonds, securities etc. which are considered 'safe' but the returns are low and on the other hand are investments made in the stock market, where the returns are high. Fund managers do not invest all the money in any one market. They spread their risk while trying to earn more returns. So, they will invest in both safe and volatile markets. |
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3 hrs confidence: peer agreement (net): +1
peer agreement (net): +1Additional explanation (don't select this as an answer) Explanation: Responding to Ramesh's invitation to comment: Cash flows from index-linked bonds are linked to an index; most frequently, this refers to (coupon) interest payments, but there are also structures where the repayment of principal (or both coupon & principal) are dependent upon the development of a given reference index. One of the most common applications of index-linked bonds is protection against inflation: if you link the return to a benchmark for inflation (such as the RPI, for example), you will, in fact, lock-in a real interest rate (as opposed to a normal fixed-income investment where the effective, inflation-adjusted rate of return is exposed to inflationary developments). The context provided refers to higher volatility affecting index-linked bond prices, "in line with crude oil prices": this can refer to inflation-indexed issues, but not necessarily (or exclusively) so. Bonds linked to commodity indices will be subject to higher volatility if the underlying reference assets fluctuate more strongly (as is currently the case with crude oil prices). Depending on the indexing structure, the price performance of index-linked issues may be more or less dominated by the reference asset. Aoife's explanation pointed into the right direction, albeit with a narrow focus on inflation-linked structures. In contrast, Ramesh's answer described the concept of diversification: the description is correct, but not relevant to the question at hand. HTH - best regards, Ralf |
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