Loan relationships: special types of security: gilt-edged securities: indexed gilts
What are indexed gilts?
Indexed gilts were devised to encourage long-term investors, in particular, individuals, pension schemes and insurance companies with pension business, who wanted to protect the value of their investment against inflation.
Where a gilt is index-linked, the amount payable on redemption is wholly or partly calculated by reference to movements in the retail price index (RPI). So if, for example, a company
- bought £70,000 of indexed gilts
- RPI at issue was 140
- RPI at redemption was 154
- the amount repayable would reflect the change in RPI.
The RPI has increased by 10%:
|(154 -140)/140||x 100||= 10|
(RPI) is based on January 1987 = 100.
The profit on redemption would be £70,000 x 10% = £7,000.