The Variants of GDP-Linked Securities

Abstract

An RS-variant would give the right to receive a given fraction of GDP; that is, it is the principal which increases with GDP. A BM-variant is structured more like a conventional bond; the coupon varies positively with the increase in GDP. In a DS-variant the charge to the debtor is as in a BM-variant, but the part paid over to the creditor is as in a plain vanilla loan; the balance is capitalized. It looks as though BM changes more than RS in response to a quantity increase, but we have no proof that this is always so. The chapter proceeds to describe a conference, which included presentation of a draft term sheet, convened by the Bank of England on what it described as GDP-linked bonds. It concludes by summarizing issues like the pari passu clause that have to be resolved in any bond offering.