Index linked gilts

wonderman

I am interested in buying some IL gilts - I know how they work in theory - the higher the RPI the higher the payments - BUT being someone who really really likes to know just what they are buying....can someone explain how the payments are calucluated and what gets paid out twice a year in interest and what gets added to the redemption value - I am assuming that the redemption is NOT the nominal value as I see that the 2016 2 1/2% IL gilt is now trading at £282.
I dont need to know how the RPI is calculated I have found that - what I would like to know is how to calculate the returns on (say this 2016 gilt as an example) assuming inflation is 3% pa each year.

Thanks

barak

I'm not surprised that nobody has replied yet! I gave up trying to understand them years ago.

withnell

I'd assiume that the gilt you quote is RPI + 2.5%?

The market value of the gilts rises and falls based on returns people feel they can get else where etc - if the market is paying 3% over RPI, then the value will fall - at the moment, 2.5% over RPI isn't bad for an institutional investor, hence values increase

Richard_DandR

http://www.dmo.gov.uk/index.aspx?page=gilts/indexlinked

barak

wonderman wrote: »

....being someone who really really likes to know just what they are buying....

wonderman - hopefully the link supplied by Richard DandR will be enough to put you off!

wonderman

Thanks for the link but I had already been there and found that one. It does not tell you clearly how the income and redemption values would be calculated.
The good thing about a big forum like this is it tells me that hardly anyone knows how they work so it makes me more determined to find out!
Once I doi I will post it on here.

wonderman

withnell wrote: »

I'd assiume that the gilt you quote is RPI + 2.5%?

The market value of the gilts rises and falls based on returns people feel they can get else where etc - if the market is paying 3% over RPI, then the value will fall - at the moment, 2.5% over RPI isn't bad for an institutional investor, hence values increase

Thanks - I can see that - and the value of the gilt will also be impacted by what the level of RPI is expected to be.

Would you be able to tell me how to calculate my returns on this 2016 2.5% IL gilt if I were to buy them tomorrow at £282 and inflation (RPI) is 3%. How much income would I receive and what would happen to the redemption value. Even better if you can do that for me - then run the figures again for 5% inflation - then I can make sure I understand it.

nrsql

My reading of it is

You need to take the nominal value of the bond - doesn't matter how much you paid.
The values are based on the issue date of the bond (minus a lag).
For redemption take the RPI at issue date and the RPI at maturity date (both minus the lag) divide maturity RPI by issue RPI and multiply by nominal value - that will give the redemption value.

For the coupon - similarly divide coupon date RPI by issue date RPI (minus lag) multiplied by nominal value divided by 2.

For 3 month lags the RPI not a spot RPI. Instead of taking the RPI at the date take the proportion of change over the month for that day of he month.
So for a 31 day month if RPI is 100 on the first day of the month and 130 on the first day of the next then for the 10th of the month use the value 110 - doesn't matter how it fluctuates during the month.

Richard_DandR

wonderman wrote: »

Thanks for the link but I had already been there and found that one. It does not tell you clearly how the income and redemption values would be calculated.
The good thing about a big forum like this is it tells me that hardly anyone knows how they work so it makes me more determined to find out!
Once I doi I will post it on here.

I think it does tell you if you wish to read it thoroughly.
http://www.dmo.gov.uk/documentview.aspx?docname=/giltsmarket/formulae/igcalc.pdf&page=Formulae/Calc
All the RPI movements are there too.

Click on calculating estimates of redemption payments and on the next screen input the inflation rate you wish to base it on and click continue.

http://www.dmo.gov.uk/reportView.aspx?rptCode=D9C&rptName=89471ec8-c06d-4eee-8a06-e1f7e704700b||INDEX-LINKED%20GILTS&reportpage=D9C

The last semi annual coupon payment will be pro rata to the uplift in the principal (£100%).

The_MoneySavingKid

http://www.incademy.com/training/Gilts-and-bonds/Introduction/1067/10002/
May help..