Opportunities that really are gilt-edged
An examination of the main attractions of index-linked
gilts.
Index-linked gilts, known as 'linkers', offer investors
full inflation protection since the value of the bond is indexed to
the retail price index (RPI). When the bonds are redeemed, they
return the original capital multiplied by the uplift in the RPI
index over their lifetime.
So, if RPI grows by 50% between the issue date of the bond and
redemption, investors would receive £1.50 for every £1
invested in capital at redemption. The bonds also return a modest
coupon, which is also linked to the evolution of RPI, with coupons
on the earlier issues generally 2.5% per annum of the uplift in RPI
in that year. Investors receive the uplift in the value of the bond
tax-free.
