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Formula sheet/NISM Series XV: Research Analyst/Economic Analysis
[ ECONOMIC ANALYSIS ]

Fisher's Relation (Nominal vs. Real Rates) & Inflation Index Ratio

Nominal Interest Rate=Real Interest Rate+Inflation Rate\text{Nominal Interest Rate} = \text{Real Interest Rate} + \text{Inflation Rate}
Index Ratio=Reference WPI/CPI on Settlement Date/Reference WPI/CPI on Issue Date\text{Index Ratio} = \text{Reference WPI}/\text{CPI on Settlement Date} / \text{Reference WPI}/\text{CPI on Issue Date}
Variables

Inflation Adjusted Principal: Base Face Value × Index Ratio; Coupon: Fixed Real Rate × Adjusted Principal.

Exam note

Protects principal and interest against purchasing power erosion in high inflation environments.

Worked example
Inflation Index Ratio and Inflation-Indexed Bond Payments

An investor holds an Inflation Indexed Bond (IIB) with a base face value of Rs 1,00,000 and a fixed real coupon rate of 3.0% p.a. payable semi-annually. The reference WPI on issue date was 120.0 and on the coupon settlement date is 132.0. Calculate the Index Ratio, adjusted principal, and semi-annual coupon payment.