Abstract
Conventional securities are generally offered at a fixed coupon rate that incorporates the underlying expected real rate of return in the economy, the market’s expectation at the time the security is issued of inflation over the duration of the instrument, a premium to compensate for the fact that future rates of inflation are uncertain, and an adjustment reflecting the tax treatment of interest on behalf of both the lender and the borrower. For simplicity, it is useful to abstract temporarily from the inflation risk premium and taxes, although both these factors will be discussed later.
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Bibliography
This essay is abstracted from Munnell and Grolnic (1986).
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Munnell, A.H., Grolnic, J.B. (2018). Indexed Securities. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_803
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DOI: https://doi.org/10.1057/978-1-349-95189-5_803
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