Index linked Bonds
There are two prices for an Index Linked Gilt. The 'clean' price & the 'dirty' price.
The clean price is the price of the underlying bond without indexing for inflation.
The dirty price is the price which is the clean price + the adjustment for RPI to the coupon and principal amount.
Some stockbrokers valuations show only the 'clean' price of the particular bond. When you buy an index linked bond at that time you have to pay the adjustment for RPI to the person you buy from. The contract note will show the clean price and the accrued inflation.
If your stockbrokers valuation system only shows the 'clean' price, it will look like you are making a loss on the investment. However once you add the accrued inflation that you have already paid for and the accrued since you bought the holding, the real value of the investment should (unless there is considerable deflation or you bought when the market was expecting massive inflation), be above that which you paid. Your broker or investment manager will be able to tell you the value of your holding at anyone time.
Reasons for buying Inflation linked gilts or bonds.
The main reason to buy these investments is to maintain the value of capital and to match future liabilities. Index Linked gilts are particularly useful holdings for pensions. For a pension to be able to maintain its real value into the future, Index Linked Gilts are a useful holding. For instance if inflation is considerable over a 10 year period, the real value of someone's pension holding ordinary gilts will be considerably eroded. Using Index Linked Gilts avoids this.
IL gilts are also low risk and help reduce volatility in a portfolio.
Some index linked gilts for example those issued by the US treasury have a floor in them to avoid any potential deflationary effects. Other countries such as Singapore also issue index linked bonds. Recently some private firms have issued index linked bonds. For example Severn Trent and National Grid. These firms are able to do this because often they are allowed by their regulator to increase their prices in line with RPI.
Hopefully this article has answered some queries. Please call us if you would like to discuss further.
Further information can be found here:
The DMO also produce daily pricing http://www.dmo.gov.uk/index.aspx?page=Gilts/Daily_Prices
Click the link to latest available pricing & yields. This will show you the clean and dirty price for the index linked bonds you hold.