Managing coupon payments on an index linked gilt ladder

Reg_Smeeton

Hi all, have been reading with interest on the Monevator blog about building a ladder of index linked gilts.

My understanding is that these gilts pay out a coupon every six months… what is the most cost effective way to keep these coupon payments “rolled up” inside the ladder?

thanks

Linton

Most Index Linked gilts have a minimal coupon (<1% per year)  so I suggest you simply keep it as cash until it is time to buy the next tranche or use it to pay fees.

Reg_Smeeton

Linton said:

Most Index Linked gilts have a minimal coupon (<1% per year)  so I suggest you simply keep it as cash until it is time to buy the next tranche or use it to pay fees.

 Thanks for your response.

Am I understanding it correctly that the index linked component effectively accumulates within the gilt?

Linton

Reg_Smeeton said:

Linton said:

Most Index Linked gilts have a minimal coupon (<1% per year)  so I suggest you simply keep it as cash until it is time to buy the next tranche or use it to pay fees.

 Thanks for your response.

Am I understanding it correctly that the index linked component effectively accumulates within the gilt?

Yes.  Normal gilts are based on an a value of £100.  Index linked gilts are based on a value of £100 increasing with RPI.  The coupon is usually a relatively small % return of the then current value and so  also increases with inflation.

LateGenXer

The calculator I wrote in lategenxer.streamlit.app/Gilt_Ladder assumes coupons are always held as cash until withdrawals.

If one plans to have the ladder withdrawals to start far in the future then it would be better to reinvest into future gilts instead of holding as cash.  I plan to one day to improve the calculator to allow to do that, but it's not trivial as it requires estimating forward interest rates (ie, what interest one can expect in a future date), from the BoE's forward yield curves (  www.bankofengland.co.uk/statistics/yield-curves ).

In the meanwhile, my recommendation is to configure a reasonable cash interest rate for the period in question based on BoE's overnight index swaps (OIS) instantaneous nominal forward curve , e.g. approximately 3% for the next 10 years.