Index linked gilt - rebate interest

Delburn

GeoffTF said:

I have looked at my contract notes and compared them with the notes that I made when talking to the dealer. iWeb calculates the price as the number of units x dirty price + accrued interest + commission. For conventional gilts, the accrued interest is included in the dirty price. This link suggests that the same is true for 3-month lag index linked gilts, but their example is clearly wrong, because it does not take account of indexation:

https://docs.londonstockexchange.com/sites/default/files/documents/accrued-interest-gilts.pdf

I cannot find a definitive reference. I bought with a fixed amount of money. The dealer has chosen the number of units to buy so that the number of units x dirty price + accrued interest + commission = the fixed amount of money. The dealer's calculation is therefore consistent with the contract note.

Strictly the dirty price includes the accrued interest, regardless of whether it is a conventional, or index-linked gilt.

See, for example the DMO:
https://www.dmo.gov.uk/media/1sljygul/yldeqns.pdf

The Tradeweb closing reference (dirty) prices for index-linked gilts also confirm this.

However, I am sure people may also use the term more loosely, particularly verbally.

When I placed a telephone trade through HL, they showed the same as you describe for IWEB, an intermediate price including the index ratio, plus a separate amount of (positive) accrued interest.  They were also happy to set the nominal to give a round sum total consideration.


...(edit) The DMO also have a Glossary where they define "dirty price", "Inflation-adjusted clean price" and "Inflation-adjusted dirty price".
https://www.dmo.gov.uk/help/glossary/

easysaver

Does the following help in terms of a definitive reference?
(Annex B - Calculation of a settlement price)
https://www.dmo.gov.uk/media/1955/yldeqns.pdf

I too found that LSE document to be misleading (simply incorrect).

TheGreenFrog

Responses have all been very helpful and educative.

My original query by email to the broker service desk asked essentially what had happened to the rebate interest, whether it was factored into the "interest" figure (which was how the contract note described the difference between aggregate clean price and total price (ignoring commission) - so entirely or almost entirely indexation on nominal, not interest) and if so whether I needed to calculate it myself.  After first response incorrectly stated I bought on coupon payment date, I got the following response:

I have further queried this with our trade management team. Your contract note showing zero days interest is actually incorrect, the interest figure is correct however. This is an error with they way contract notes are produced for I/L GILTS, .......You placed the trade on 13/03/2023 with a settlement date of 15/03/2023, 7 days before the next coupon date, as you correctly mentioned the coupon date is today (22/03/2023). Therefore, you paid 174 days interest to the previous owner of the GILT.... However, when the payment is received for today's coupon, this will be credited to you for the full period. When trading Indexed-linked GILTs on the secondary market, ex-dividend dates do not apply to the trade. Only the amount of days interest owed and indexation. On the contract note, this is all shown as interest.

Hence my confusion!  I suspect that the rebate is indeed in the price and that they will end up confirming this and I will end up calculating it (it will be vanishingly small so I won't spend too much time and will round up for tax return purposes).

masonic

Yes, I can definitely understand your confusion!

TheGreenFrog

The broker has just responded to me confirming that the rebate interest was in the "'interest figure", and itemising the split between indexation and (negative) interest (so I have withdrawn my complaint!).

GeoffTF

Delburn said:

GeoffTF said:

I have looked at my contract notes and compared them with the notes that I made when talking to the dealer. iWeb calculates the price as the number of units x dirty price + accrued interest + commission. For conventional gilts, the accrued interest is included in the dirty price. This link suggests that the same is true for 3-month lag index linked gilts, but their example is clearly wrong, because it does not take account of indexation:

https://docs.londonstockexchange.com/sites/default/files/documents/accrued-interest-gilts.pdf

I cannot find a definitive reference. I bought with a fixed amount of money. The dealer has chosen the number of units to buy so that the number of units x dirty price + accrued interest + commission = the fixed amount of money. The dealer's calculation is therefore consistent with the contract note.

Strictly the dirty price includes the accrued interest, regardless of whether it is a conventional, or index-linked gilt.

See, for example the DMO:
https://www.dmo.gov.uk/media/1sljygul/yldeqns.pdf

The Tradeweb closing reference (dirty) prices for index-linked gilts also confirm this.

However, I am sure people may also use the term more loosely, particularly verbally.

When I placed a telephone trade through HL, they showed the same as you describe for IWEB, an intermediate price including the index ratio, plus a separate amount of (positive) accrued interest.  They were also happy to set the nominal to give a round sum total consideration.


...(edit) The DMO also have a Glossary where they define "dirty price", "Inflation-adjusted clean price" and "Inflation-adjusted dirty price".
https://www.dmo.gov.uk/help/glossary/

Thanks for that. The DMO Glossary is absolutely clear. iWeb dealers are confusing matters by calling the real clean price the dirty price. Perhaps they should call it the grubby price: dirtier than the clean price, but not as dirty as the dirty price. I expect that the cash flows are right. They did make a mistake with a T29 interest payment on the last consolidated tax certificate, but they did eventually send me a corrected paper certificate.