GPD-linked Bonds as a Financing Tool for Developing Countries and Emerging Markets

The paper examines the applicability of GDP-linked bonds for the financing of developing countries and emerging markets. GDP-linked bonds are bonds of which the coupon and/or redemption payments are tied to the GDP of the issuing country. The study encompasses a detailed empirical analysis of their pricing behaviour, the pricing sensitivities to changes in GDP, and of their behaviour in a portfolio context is conducted. A survey amongst potential investors as well as issuing-side capital market participants assesses the prospects of success of this new type of bond. Finally, the usefulness of a partial public guarantee of payments is examined. The paper provides evidence under which circumstances, for which investors and for which countries GDP-linked bonds might be an appropriate investment vehicle.

Schröder, Michael, Friedrich Heinemann, Susanne Kruse and Matthias Meitner (2004), GPD-linked Bonds as a Financing Tool for Developing Countries and Emerging Markets, ZEW Discussion Paper No. 04-64, Mannheim.