80% loss in 2 years on 'low risk' Index Linked Gilt

[BondSquared]

https://www.dmo.gov.uk/data/gilt-market ... ked-gilts/

https://www.dmo.gov.uk/data/pdfdatarepo ... rtCode=D9C

[DrFfybes]

Currently they're £62 or so, so over the next 50 years the annual return will be roughly 1.5 x RPI (+ the nominal interest), as the RPI increase applies to the £100 Par value? ie - if inflation is 3% for the next 50 years the actual return if bought today would be nearer 4.5%?

The current unindexed price is around £62. Indexation applies/will apply to both the current price and redemption amount, so if you buy today then in 50 years time you'll be able to buy 100/62 = 1.613 times more gobstoppers than you could today, irrespective of the level of inflation (assuming gobstopper inflation is the same as the increase in the indexation ).

For yields it's best to think in real terms and you can use the unindexed values to get the real (post inflation) gross redemption yield.

=YIELD(TODAY(),"22-Mar-2073",0.125%,62,100,2,3) gives 1.13%

https://www.yieldgimp.com/index-linked-gilt-yields says that the current indexation ratio is 1.21794, so the indexed price is currently ~£62 * 1.21794 = ~£75.51, and the current coupon 12.5p * 1.21794 = 15.22p.

Thanks for that, you have confirmed I don't fully understand them. I can 'get' normal bonds/gilts, but the indexation is too much for my small brain.

From your reply and further reading since it seems the Actual Price one would pay to buy them today is the Market Price x indexation (plus any interest accrued since the last payment date?). I was going to ask "why not just quote the indexed prices?" but then looked at TR24, which with 5 months to go is quoted at £99.10. You'd permanently be adjusting the price and final value by the index , but being IL it means they will still return £100 per £99.10 invested today (ignoring the interest), you just get fewer 'units' for your stake.

Thanks

Paul

[mc2fool]

Thanks for that, you have confirmed I don't fully understand them. I can 'get' normal bonds/gilts, but the indexation is too much for my small brain.

From your reply and further reading since it seems the Actual Price one would pay to buy them today is the Market Price x indexation (plus any interest accrued since the last payment date?). I was going to ask "why not just quote the indexed prices?

Yes, formally you pay the clean price times indexation plus accrued interest. The advantage of quoting it as they do is that you can tell at a glance how much it's below or over par. If they quoted the indexed price you'd have to go off and find/figure out what the current indexed par value is to determine if it's below or over par, and by how much.

There have been a couple of recent-ish (long-ish) threads on index linked gilts. See viewtopic.php?p=604783#p604783 and viewtopic.php?p=604678#p604678.

[Alaric]

The PAR value is £100, so why such a high initial high price - was it oversubscribed?

I think the high initial price recognises that it was issued at a negative real yield. In other words, you get less back than you put in. If inflation was zero you get back 100 for every 330 invested. No wonder defined benefit schemes with indexed bnefits became unaffordable. There's a coupon but that was next to zero at 0.125%