Buying an Index Linked Gilt.

[Deleted User]

This is not about buying a gilt fund, but buying one index linked gilt.

https://www.fixedincomeinvestor.co.uk/x/bondchart.html?id=3472&stash=F6ADE008&groupid=3530

The price is £195.
Issue date 2007.
Maturity date 2047.
And the coupon is Inflation plus 0.75%.

The yield is minus 1.829. How is this calculated? The way I see it is:


£195 for £100. The maturity payment in 2047 is also inflation adjusted I believe, so the initial £100 in 2007 is now worth say £125 in 2019 due to inflation. So I'm paying £195 for £125? So £125 plus 0.75%x28 years for £195.
The bond has 28 years remaining. £146 for £195 is a £49 loss. £49 loss on £195 is 25%. Minus 25% divided by 28 years is not minus 1.829.

Any opinion on where I've gone wrong?

Reaper

I'm not going to attempt to work it out as inflation linked yields are a nightmare. See this page on the same site:
https://www.fixedincomeinvestor.co.uk/x/learnaboutbonds.html?id=206

All I will say is you seem to be including the maturity payment in your figures, so surely what you are describing is the running yield. If so the figure is 0.38% not -1.829%

danm

newbinvestor wrote: »

This is not about buying a gilt fund, but buying one index linked gilt.

https://www.fixedincomeinvestor.co.uk/x/bondchart.html?id=3472&stash=F6ADE008&groupid=3530

The price is £195.
Issue date 2007.
Maturity date 2047.
And the coupon is Inflation plus 0.75%.

The yield is minus 1.829. How is this calculated? The way I see it is:


£195 for £100. The maturity payment in 2047 is also inflation adjusted I believe, so the initial £100 in 2007 is now worth say £125 in 2019 due to inflation. So I'm paying £195 for £125? So £125 plus 0.75%x28 years for £195.
The bond has 28 years remaining. £146 for £195 is a £49 loss. £49 loss on £195 is 25%. Minus 25% divided by 28 years is not minus 1.829.

Any opinion on where I've gone wrong?

the key input to this is the inflation curve....


you start by "is now worth say"...... that will never allow you to get back to the exact number as they will be calculating based on a very precise value based on inflation expectations.

[Deleted User]

Apparently the price was the "Clean" price which doesn't include RPI in the original £100.
The "Dirty" price is £273 here https://www.sharecast.com/gilt/United_Kingdom_IL_Treasury_Gilt_221147

Quite confusing

danm

newbinvestor wrote: »

Apparently the price was the "Clean" price which doesn't include RPI in the original £100.
The "Dirty" price is £273 here https://www.sharecast.com/gilt/United_Kingdom_IL_Treasury_Gilt_221147

Quite confusing

i am pretty sure the dirty price is because when you buy today you are paying the inflation since issuance.


there is an 'index ratio' attached to this bond of 1.402520


195*1.402520 = ~273


essentially when you buy the bond, you need to compensate the existing holder for the accrued interest - in this case that includes inflation.

masonic

If a bank offered a savings account offering a rate of about half RPI for 28 years, with an early exit penalty to be decided in the future, or a 60% capital loss if held to maturity, would you be interested?

SeekTruth

newbinvestor wrote: »

This is not about buying a gilt fund, but buying one index linked gilt.

https://www.fixedincomeinvestor.co.uk/x/bondchart.html?id=3472&stash=F6ADE008&groupid=3530

The price is £195.
Issue date 2007.
Maturity date 2047.
And the coupon is Inflation plus 0.75%.

The yield is minus 1.829. How is this calculated? The way I see it is:


£195 for £100. The maturity payment in 2047 is also inflation adjusted I believe, so the initial £100 in 2007 is now worth say £125 in 2019 due to inflation. So I'm paying £195 for £125? So £125 plus 0.75%x28 years for £195.
The bond has 28 years remaining. £146 for £195 is a £49 loss. £49 loss on £195 is 25%. Minus 25% divided by 28 years is not minus 1.829.

Any opinion on where I've gone wrong?

See https://www.dmo.gov.uk/media/1955/yldeqns.pdf, particularly Annex B.

For those unsure about the difference between 3-month lag and 8-month lag for index-linked gilts see https://www.dmo.gov.uk/media/1954/indexlinked3m.pdf

[Deleted User]

Thanks,

March 2050 0.5%. Clean price around £190. Dirty price around £258.

Does anyone know how on earth is the yield calculated as -1.75%?

https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3540

Thrugelmir

newbinvestor wrote: »

Does anyone know how on earth is the yield calculated as -1.75%?

Does it matter?

[Deleted User]

Thrugelmir wrote: »

Does it matter?

Yes

March 2050 0.5%. Clean price around £190. Dirty price around £258.

The way I see it, is I'm paying £258 for the original £100 multiplied by the index factor which is 1.36 from the DMO website, so £136,

£258 for £136, plus 15% (0.5% x 30 years) is around £20, so £156 for £258. That is around minus 3 percent per year. Highly confusing.

masonic

At a rough guess, if you use Excel's XIRR function and put in your sequence of transactions including actual price paid to acquire a gilt (£258), interest payments (50p per year) and final redemption payment (£136 including indexing already reflected in the price - current RPI(290.4)/base RPI(213.4) = 1.36), it will spit out the right answer. I get -1.72%.