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I'm trying to find a formula to calculate the YTM of inflation-linked bonds. I've tried using the conventional YTM formula for bonds and then just adjusting the coupon to the inflation adjusted coupon, but this doesn't seem to be giving an accurate result.

Could someone point me in the correct direction?

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If it is the real-yield - which is the nominal yield minus inflation - that you are after then you just use the real coupon and price to calculate the yield the same way you would have done with the nominal coupon and price on a nominal bond as it says in the wikipedia: "in the case of inflation-indexed bonds such as TIPS, the bond yield is specified as a rate in excess of inflation, so the real yield can be easily calculated using a standard bond calculation formula".

However, if it is the projected nominal yield you are looking for, I guess you could add inflation quotes from inflation swaps to get some sort of market implicit nominal yield. Then again, for this you should just look at the ordinary nominal market.

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  • $\begingroup$ do you mind elaborating, please, so I want to price a government inflation linked bond, I have YTM from non inflation linked bonds, say I have the CPI for my bond, is that all I need, I mean do I use YTM + CPI or real yield + CPI? $\endgroup$
    – Skittles
    Commented Oct 15 at 8:14
  • $\begingroup$ In what respect do you want to price it? What are your inputs, the real yield, a CPI projection to maturity? $\endgroup$
    – Mats Lind
    Commented Oct 15 at 8:58
  • $\begingroup$ I have YTM of non inflation linked govt bonds, and CPI from reuters/bloomberg which I believe is the same to CPI projection to matuirty, I was told I can calculate the price using YTM of non linkers and * CPI to get the price? $\endgroup$
    – Skittles
    Commented Oct 15 at 14:06
  • $\begingroup$ real YTM or nominal YTM? $\endgroup$
    – Mats Lind
    Commented Oct 16 at 14:08
  • $\begingroup$ Sorry, you said YTM of non inflation linked, so that's nominal YTM: If you take Real YTM = Nominal YTM minus annual relative CPI increase to maturity then you would get the drity price of your linker inserting the real YTM in the real coupons and repayment schedule for the linker the same way you would with the YTM and the (nominal) repayment schedule of an ordinary bond. $\endgroup$
    – Mats Lind
    Commented Oct 16 at 14:18

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