CFM37120 | 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.