Index Linked Gilts (Dirty prices)

jake_jones99

I am interested in the following index linked Gilt: 0 1/8% IL TR GILT 2024, ISIN: GB00B85SFQ54. It has a "clean price" of roughly £100, and a "dirty price" of roughly £150 (the index ratio is ~1.5). My questions are the following:
1) I called my broker (Aj Bell) and they are unable to confirm the dirty price I would be buying it for. They say I should tell them I want to invest X amount and they can only quote the clean price and then proceed to purchase via the dirty price. I know the formula is there on the DMO website, but is it normal, to "work out" the real price by yourself, and then check if you were right only after you made the purchase?

2) I found the dirty price on tradeweb.com, but my trader is unable to confirm if that dirty price is the right one. Again, is it normal to place an order without a quote of the final price, only by working it out by yourself on paper? I would be willing to invest larger sums, but I would want a quote, or at least an accurate estimation of the quote.

3) Is anyone aware of any sites that compute automatically the dirty price, redemption value and have everything in one place (Reference RPI, Index ratios etc)?

Thanks for any input!

GeoffTF

That is how IL gilt trades work with AJ Bell. With iWeb, you speak to the dealer. Irrespective of the broker, trades take place at the clean price and are settled at the dirty price, but you can place a trade to invest X or raise X. The prices on Tradeweb are updated to the last closing price at 2 p.m. on the next trading day, so they will never be "right", except by chance.

Linton

I do not know of where you can find out the dirty price. However I don't believe it should make any difference to your buying decision, the clean price tells you all you need to know.

AIUI, If two IL gilts have the same clean price, the same maturity date, and the same coupon (interest rate) they will provide exactly the same return. You need only think n terms of having £x invested in say 1/8% 2035 IL gilts.

You could in principle have IL gilt A with a dirty price of £150 and gilt B with the same terms issued 5 years later with a dirty price of £135 since the accrued inflation gain would be lower. They would have the same clean price, say £100. If you bought £10k of either the amount of interest would be 1/8% per year and your gains on maturity would be the same. If the clean price of both was higher your interest and gain on maturity would be proportionately less.

Again if you sold before maturity the gains from holding A or B would be the same, only depending on the rate of inflation and the clean price at the time.

Hopefully someone with greater knowledge can confirm my understanding.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/80028749#Comment_80028749

Gilts are auctioned at various points during their lifetime. They are not issued at par. Indexation increases the value of both the capital and the coupons. You also need to account for accrued interest. You can calculate the real redemption yield using non-indexed values and zero inflation.

A shortcut is to take the last real redemption yield and clean price from Tradeweb, work out how much the 15 minute delayed clean price has changed, convert that into an annulised percentage, and use that to adjust Tradeweb's real redemption yield. What you need to decide before you trade is the highest clean price that you are willing to pay. You do not need the current price to do that.

Linton

https://forums.moneysavingexpert.com/discussion/comment/80029244#Comment_80029244

Gilts are not issued at par. But that is irrelevent since you as a small private investor cannot easily buy them when issued anyway. However the clean price relative to par is important as par defines your returns up to maturity.

I feel your approach is taking a long and complex way around what is really a very simple assessment.. Presumably you are buying IL bonds as a guaranteed protection against inflation whatever the rate may be. If you want high ongoing interest or high growth you would buy some other investment. When you buy at or below a par clean price you will get at least get the protection you want plus what is currently a pretty small interest payment compared with other sources of ongoing interest.

easysaver

I agree with Linton in that the clean price tells you what you need to know. The yield is determined by the clean price (you can use the yield function in excel to calculate the yield using the clean price, issue date, current date and coupon as inputs). The dirty price is used to calculate the number of actual bonds you'll purchase.

I would highly recommend you go through the calculations to derive the dirty price yourself in excel or similar, if only to demonstrate the difference between the clean and dirty price. I don't mean to sound harsh but I think you need to get a handle on the difference before you consider purchasing.

To calculate the dirty price you need to go through the following steps, all of which are documented on the DMO site: determine the base RPI and reference RPI, calculate the index ratio from these, calculate the accrued interest taking into account possible short dividend periods or within ex-dividend dates, finally the dirty price = index ratio x clean price + accrued interest.

jake_jones99

https://forums.moneysavingexpert.com/discussion/comment/80029458#Comment_80029458

I already calculated these but I am used to the trader confirming the final price before the purchase. You all do have a point that the clean price should tell you everything, but in the case of IL bonds the reference RPI is actually the one making the big change in principal (the coupon is negligible on the one I'm looking at). So let's assume for the sake of the argument you manage to buy exactly when the price is £100 (par). Then you have to fully rely on your RPI calculations to know how much you get at the end until the money actually comes in. Again, I know the computations aren't that hard (just a few fractions given the coupon is negligible). I guess it's just about getting used to a new instrument. Thanks everyone!

Linton

jake_jones99 said:

https://forums.moneysavingexpert.com/discussion/comment/80029458#Comment_80029458

I already calculated these but I am used to the trader confirming the final price before the purchase. You all do have a point that the clean price should tell you everything, but in the case of IL bonds the reference RPI is actually the one making the big change in principal (the coupon is negligible on the one I'm looking at). So let's assume for the sake of the argument you manage to buy exactly when the price is £100 (par). Then you have to fully rely on your RPI calculations to know how much you get at the end until the money actually comes in. Again, I know the computations aren't that hard (just a few fractions given the coupon is negligible). I guess it's just about getting used to a new instrument. Thanks everyone!

AIUI, the amount you get at the end as a % of your investment in IL bonds is more easily calculated from the clean price than from the dirty price and in both cases will depend on the actual future inflation rates.   The dirty price is all about accounting for the accrued gains made before you buy the bond, which you dont need to know in order to calculate what you will make after you buy it.

jake_jones99

Linton said:

jake_jones99 said:

https://forums.moneysavingexpert.com/discussion/comment/80029458#Comment_80029458

I already calculated these but I am used to the trader confirming the final price before the purchase. You all do have a point that the clean price should tell you everything, but in the case of IL bonds the reference RPI is actually the one making the big change in principal (the coupon is negligible on the one I'm looking at). So let's assume for the sake of the argument you manage to buy exactly when the price is £100 (par). Then you have to fully rely on your RPI calculations to know how much you get at the end until the money actually comes in. Again, I know the computations aren't that hard (just a few fractions given the coupon is negligible). I guess it's just about getting used to a new instrument. Thanks everyone!

AIUI, the amount you get at the end as a % of your investment in IL bonds is more easily calculated from the clean price than from the dirty price and in both cases will depend on the actual future inflation rates.   The dirty price is all about accounting for the accrued gains made before you buy the bond, which you dont need to know in order to calculate what you will make after you buy it.

What I meant is you need the inflation-adjusted clean price. I was mistakenly calling this the dirty price but that just accounts for the accrued interest. So I agree you just need the inflation-adjusted clean price to work out the redemption, and they would make your life easier if they also displayed this. But you can work it out by yourself 

easysaver

jake_jones99 said:

Linton said:

jake_jones99 said:

https://forums.moneysavingexpert.com/discussion/comment/80029458#Comment_80029458

I already calculated these but I am used to the trader confirming the final price before the purchase. You all do have a point that the clean price should tell you everything, but in the case of IL bonds the reference RPI is actually the one making the big change in principal (the coupon is negligible on the one I'm looking at). So let's assume for the sake of the argument you manage to buy exactly when the price is £100 (par). Then you have to fully rely on your RPI calculations to know how much you get at the end until the money actually comes in. Again, I know the computations aren't that hard (just a few fractions given the coupon is negligible). I guess it's just about getting used to a new instrument. Thanks everyone!

AIUI, the amount you get at the end as a % of your investment in IL bonds is more easily calculated from the clean price than from the dirty price and in both cases will depend on the actual future inflation rates.   The dirty price is all about accounting for the accrued gains made before you buy the bond, which you dont need to know in order to calculate what you will make after you buy it.

What I meant is you need the inflation-adjusted clean price. I was mistakenly calling this the dirty price but that just accounts for the accrued interest. So I agree you just need the inflation-adjusted clean price to work out the redemption, and they would make your life easier if they also displayed this. But you can work it out by yourself 

You're probably aware of the redemption payment report on the DMO but on the off chance you haven't seen it:
https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D9C

I wasn't able to find an IL calculator the last time I searched but you'd of thought there's enough interest for someone to develop one.

Linton

jake_jones99 said:

Linton said:

jake_jones99 said:

https://forums.moneysavingexpert.com/discussion/comment/80029458#Comment_80029458

I already calculated these but I am used to the trader confirming the final price before the purchase. You all do have a point that the clean price should tell you everything, but in the case of IL bonds the reference RPI is actually the one making the big change in principal (the coupon is negligible on the one I'm looking at). So let's assume for the sake of the argument you manage to buy exactly when the price is £100 (par). Then you have to fully rely on your RPI calculations to know how much you get at the end until the money actually comes in. Again, I know the computations aren't that hard (just a few fractions given the coupon is negligible). I guess it's just about getting used to a new instrument. Thanks everyone!

AIUI, the amount you get at the end as a % of your investment in IL bonds is more easily calculated from the clean price than from the dirty price and in both cases will depend on the actual future inflation rates.   The dirty price is all about accounting for the accrued gains made before you buy the bond, which you dont need to know in order to calculate what you will make after you buy it.

What I meant is you need the inflation-adjusted clean price. I was mistakenly calling this the dirty price but that just accounts for the accrued interest. So I agree you just need the inflation-adjusted clean price to work out the redemption, and they would make your life easier if they also displayed this. But you can work it out by yourself 

No,  I meant the pure quoted clean price.  The dirty price includes the adjustment for inflation gains accrued before you bought the bonds.

Look at it this way, assuming the market price for a IL new bond remains at £100, there is 0% coupon, and that there is no premium for longer dated bonds....

Say a new 10 year IL bond was issued 5 years ago for £100 and since then its accrued value has risen to £120 thanks to inflation.  The clean price would be £100 and the dirty price £120.  So if your wanted to buy £1200 of this bond you would pay  the dirty price and get 10 bonds each worth £120.  Or if bonds of the same type but at 5 years duration were issued now at £100 you could pay £1200 for 12 of the new bonds each worth £100.  In both cases you have invested £1200 in 5 year duration IL bonds

Also, in both cases over the next 5 years the value of your £1200 will increase by inflation.  Your future gain would be calculated simply by increasing £1200 by inflation.