Dollar Bond Index-Linked Securities (Dollar BILS)

What Are Dollar Bond Index-Linked Securities?

Dollar Bond Index-Linked Securities (Dollar BILS) are a type of debt instrument whose interest not set in stone at maturity by the return performance of a predefined index over a given holding period. Due to this structure, Dollar BILS are sorted as zero-coupon floating rate debt.

Understanding Dollar Bond Index-Linked Securities (Dollar BILS)

Dollar BILS are commonly valuable for companies taking part in asset-liability matching. For instance, assuming that a company has a large liability due in six months, the company could invest its cash into dollar BILS now, as opposed to just allowing the cash to sit idle for that time. The effective interest rate the company will receive from holding the dollar BILS will be equivalent to the return of the predetermined index during that time span, permitting the company to participate in any additions/misfortunes the index causes during that time span, yet additionally as yet guaranteeing that the company will actually want to liquidate its position for cash on the date it needs the funds to pay its liability.

Limitations of Dollar BILS

Dollar BILS and other index-linked securities carry a higher risk than traditional zero-coupon bonds and other fixed-income securities due to their dependence on the variable returns of an index to generate interest income and safeguard principal. Zero-coupon bonds are purchased at a deep discount to face value and earn interest because of appreciation to par at maturity. Investors in zero-coupon bonds are guaranteed to get back the face value of the bond at maturity yet Dollar BILS don't carry such confirmations. In the event that these securities are linked to an equity index, for example, the S&P 500, an investor could receive back not exactly their original principal should the value of the index be lower at maturity than at purchase.

Index-linked securities have different provisions that decide the interest an investor will receive. A few securities accompany capital protection or a capital guarantee from the issuer, normally an investment bank or brokerage, that guarantees return of principal at maturity. The participation rate offered by every security influences the amount of interest received. Securities with a 100% participation rate will receive interest in view of the full return of the underlying index while those with a participation rate of 80%, for example, will receive 80% of the underlying index return.

Dollars BILS likewise vary from inflation-linked bonds which cause periodic coupon payments that to change with changes in the inflation rate, normally estimated in the U.S. by the Consumer Price Index.