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Report of the Fixed-Interest Working Group

Published online by Cambridge University Press:  10 June 2011

K.S. Feldman ,
B. Bergman ,
A.J.G. Cairns ,
G.B. Chaplin ,
G.D. Gwilt ,
P.R. Lockyer  and
F.B. Turley
K.S. Feldman
Affiliation:
Robert Fleming & Co Ltd, 25 Copthall Avenue, London EC2R 7DR, U.K. Tel: +44(0)171-638-5858; Fax: +44(0)171-628-0053; E-mail: keith.s.feldman@flemings.com
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Abstract

Actuarial models of the market in conventional British Government Stocks, also known as the Gilt-Edged market, are reviewed and contrasted with the methods which have been developed, during the last twenty years, by financial economists.

Following the Treasury's announcement in May 1995 (regarding the taxation of institutional bond holdings), the so-called ‘coupon effect’ has largely disappeared and gilt prices can now be fitted very closely by using the same simple discounting functions for both income and capital flows. A new model suitable for the calculation of yield indices is proposed and is contrasted with the model currently underlying the FTSE Actuaries Government Securities (FTSEAGS) Yield Indices. A number of new possible applications of the reformulated yield indices, such as forward pricing, asset/liability matching and stochastic simulation, are discussed. An analogous model for index-linked gilts leads to applications involving the forward market in the retail prices index.

A survey of professional users of the FTSEAGS Indices is described, and a revised presentation for the published yield indices is suggested. A summary of current statutory references to the indices is presented.

Keywords

GiltsFTSEAGS IndicesBond ModellingForward RatesInterest-Rate DerivativesMatching
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 4 , Issue 2 , 01 June 1998 , pp. 213 - 263
Copyright
Copyright © Institute and Faculty of Actuaries 1998

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