Index Linked Gilts

Reg_Smeeton

zagfles said:

No the capital gain/loss has nothing to do with the coupon, it's just the difference between the price you pay when you buy and the price you get at maturity (or when you sell), ie purely the capital.

The YTM (yield to maturity) accounts for the capital gain/loss. Loads online about how to calculate this, but for IL gilts I just think of everything in real terms.

So for high coupon gilts like T30I you'll always make a (real terms) capital loss if held to maturity but that's compensated for by the high coupon, and for low coupon gilts you might make a capital gain. Usually they work out about the same YTM. Tax is different though - if held unwrapped there's no tax on the capital gain but there is on the coupon. So holding high coupon gilts unwrapped may not be a good idea, may be better in a SIPP/ISA.

Thanks for replying, sorry I think I have my terminology wrong… I’m actually interested in calculating the total return of any given gilt rather than the capital gain… therefore (Current Index Ratio/Dirty price)+(coupon amount x years to maturity)=total return.

(if it helps I’m looking at the feasibility of building a closed ended IL gilt ladder in my SIPP with the 2052 0.25% gilt as the top rung)

zagfles

Reg_Smeeton said:

zagfles said:

No the capital gain/loss has nothing to do with the coupon, it's just the difference between the price you pay when you buy and the price you get at maturity (or when you sell), ie purely the capital.

The YTM (yield to maturity) accounts for the capital gain/loss. Loads online about how to calculate this, but for IL gilts I just think of everything in real terms.

So for high coupon gilts like T30I you'll always make a (real terms) capital loss if held to maturity but that's compensated for by the high coupon, and for low coupon gilts you might make a capital gain. Usually they work out about the same YTM. Tax is different though - if held unwrapped there's no tax on the capital gain but there is on the coupon. So holding high coupon gilts unwrapped may not be a good idea, may be better in a SIPP/ISA.

Thanks for replying, sorry I think I have my terminology wrong… I’m actually interested in calculating the total return of any given gilt rather than the capital gain… therefore (Current Index Ratio/Dirty price)+(coupon amount x years to maturity)=total return.

(if it helps I’m looking at the feasibility of building a closed ended IL gilt ladder in my SIPP with the 2052 0.25% gilt as the top rung)

For a gilts ladder you don't really need to calculate the total return for any individual gilt, assuming the purpose is to provide an annual income for the period of the ladder. What you need to calculate is the redemption value plus income from all gilts held, so eg in the last year you need to account for the redemption of the last gilt and its income that year, but going backwards for the second last you need to account for the redemption plus income from the last 2 gilts, and so on back to the first where you account for redemption plus the income from all the gilts.

For the new style gilts you don't need to worry about index ratios, as the clean price accounts for the current inflation uplift. For the old style ones you do.

The other thing to account for is the period between redemption dates because it's not always a year. So eg if one gilt matures 10//08/2031 and the next on 22/11/2032, you need 1.29 years worth of income for that period. Also account for charges eg platform charges, buying costs etc. You can account for platform charges by adding the annual charge (if it's flat) to the annual income requirement.

So you can work out the amount of gilts you require (in real redemption terms) for a period between gilt maturities as [annual income requirement + charges - total annual coupons on this and later gilts] x [years till next gilt matures]. That'll be approximate of course as coupon payments are 6-monthly and may not coincide exactly with when you want to draw the income.

Then the cost can be worked out as clean price x gilts requirement in real redemption terms + buy cost

The actual number you'll get will be based on the dirty price eg if the index ratio 1.5 and you need £10,000 worth in today's redemption terms you'll actually get 6666 gilts.

Reg_Smeeton

zagfles said:

Then the cost can be worked out as clean price x gilts requirement in real redemption terms + buy cost

Bingo, almost like solving the problem by turning it on its head.

You’ve been incredibly helpful, thanks!