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Subject:  CPI-Linked Interest Rate Derivatives Date:  7/19/2006  7:12 PM
Author:  imdajunkman Number:  17593 of 36468


There are so many threads running right now that I can't keep track of what has been said to whom about what, and some interesting stuff is getting buried. So I've repeated our exchange below, because I'd like to pursue it. I tried to find SLM, but came up empty. But just now I varied a search I use for bond offering lists and came up with several such CPI-linked derivatives, plus others.

Issue: Slm Corp Ednotes Book Entry Floating/Variable Coupon - Monthly Reset,12Mo%change in CPI-U+215bps, reset mo, but in no case <0%.1st cpn 4.95%

I am definitely NOT saying that anyone should look at these things. They scare me. But they do exist, and some of this board's members might be able to evaluate them properly and be able to manage their risks.

If anyone wants to find them, relax the restriction on “SP/Moody” to “All” and set “Max coupon” to “zero”. This is the simplest of searches, but it's one I've never used before. Normally when I'm looking for zero corporates (which I do buy), I restrict the rating to triple-AAA. So I've never encountered zeros that were derivatives before and, maybe, more are coming onto the market lately as Wall Street's whiz kids churn out increasingly sophisticated products.

I wrote: I did a search, and you seem to have had the lead on the discussions of ISM, which amounts to a fairly complex interest rate derivative. Its yield didn't depend on understanding the business of the issuer, but on broad economic factors (where my crystal ball is no better than anyone else's).

markr33 replied: They aren't all that complex. In fact, the way I look at them, they are very similar to TIPS, have a fixed rate and a variable rate derived from monthly CPI changes. The main things that attracted me to them are:

* They are traded on a regular exchange and therefore only cost $8 to purchase or to sell (essentially any amount)
* They have a higher effective fixed rate than TIPS
* Because of the low cost of trading, they can be traded (and I have once taken advantage of certain inexplicable inefficiencies between 2 similar issues resulting in a nice profit)

The only ones that trade on a regular exchange that I am aware of right now are ISM, OSM, and JSM.

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