How are my index-linked gilt payments affected by movements in the level of RPI?
Index-linked gilts, a form of real bond, are indexed to the Retail Price Index (“RPI”). When the RPI rises, the inflation uplift that applies to index-linked cash flows also rises. If the RPI should fall, the inflation uplift would also fall. An index-linked gilt will pay more than £100 at redemption if the RPI increases over the life of the gilt; conversely, it will pay less than £100 should the RPI fall over the life of the gilt. Similarly, if the RPI increases over the life of the gilt each coupon payment will be higher than the previous one; while if the RPI were to decrease, a coupon payment could be lower than the previous one. In this way, the returns to the investor from holding index-linked gilts are maintained in real terms – as measured by the RPI.
