Commodity-Linked Bonds: A Potential Means for Less-Developed Countries to Raise Foreign Capital
AbstractThe author suggests that commodity-linked bonds could provide a potential means for less-developed countries (LDCs) to raise money on the international capital markets, rather than through standard forms of financing. The issue of this type of bond could provide an opportunity for commodity-producing LDCs to hedge against fluctuations in their export earnings. The author's results show that the value of a commodity-linked bond increases as the price of the commodity indexed to the bond rises; this suggests that, if LDCs had issued debt contracts that were tied to their main export commodities, then their debt load would decline along with plummeting export prices (or export revenues). A simple portfolio rule derived by the author suggests that LDCs should issue more commodity-linked bonds than conventional debt if the variance of the portfolio is greater than twice the spread between the expected total return of the conventional debt and the commodity-linked bond. This rule supports the view that, if more of the LDCs' debt were issued in the form of commodity-linked bonds, then the debt-service payment of the LDCs would decline along with export prices (or export revenues), thus lightening their debt load.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 04-20.
Length: 43 pages
Date of creation: 2004
Date of revision:
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Development economics; Financial markets; International topics;
Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-23 (All new papers)
- NEP-DEV-2004-08-23 (Development)
- NEP-FIN-2004-08-23 (Finance)
- NEP-FMK-2004-08-23 (Financial Markets)
- NEP-MFD-2004-08-23 (Microfinance)
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