RSA Retail bonds

CathJ

CathJ

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Question for the financial guru's around here - can you explain the inflation-linked rsa retail bonds? I understand the fixed interest option, but don't understand the interest rate figures quoted for the infation-linked ones.
 
What exactly are you struggling to understand? (I'm trying to understand so I can explain?)

Basically all interest rates on bonds are calculated daily. So if you have a fixed rate it will always be the same. But with a variable rate it will change on the day the interest rate changes.

So if, for 14 days, the rate stays the same, and then for the other 16 days of the month the rate is lower (or higher) the interest is calculated on those 16 days on the new rate and added to the first 14 days at the old rate.

Or did I misunderstand your initial confusion?
 
I wasn't sure where the coupon rate they quoted (e.g. 2.25%, compared to 9.75% for fixed rate bonds) was used. I was trying to work out if inflation is on coupon day is, say, 6%, then is your coupon rate 6+2.25 = 8.25% for that coupon?

But it seems as though your coupon rate stays at 2.25% throughout the investment (same as for a fixed rate bond), but your capital would be adjusted upwards by 6% each month. Then I'm not sure if the coupon is 2.25% of your original capital amount, or the adjusted amount.. I'd guess adjusted, but I'm not sure.
 
CathJ said:
I wasn't sure where the coupon rate they quoted (e.g. 2.25%, compared to 9.75% for fixed rate bonds) was used. I was trying to work out if inflation is on coupon day is, say, 6%, then is your coupon rate 6+2.25 = 8.25% for that coupon?

But it seems as though your coupon rate stays at 2.25% throughout the investment (same as for a fixed rate bond), but your capital would be adjusted upwards by 6% each month. Then I'm not sure if the coupon is 2.25% of your original capital amount, or the adjusted amount.. I'd guess adjusted, but I'm not sure.
Click to expand...

If in doubt, the one that makes you the least amount of money makes the most sense. ;)
 
Only the capital amount is adjusted for inflation (CPI). But the coupon is applied to the inflation adjusted amount, yes. And remember that inflation linked retail bonds are FRNs (floating rate notes), so the coupon is determined by the bond yield curve - it is not a flat, quoted coupon until maturity - i.e. it does not stay the same for the duration of your investment, like fixed rate notes.

A simple answer though, is yes, the coupon (interest) is applied to the inflation adjusted capital amount at the coupon payment date. In this case, the one which earns you the least interest is not correct, Acid. Your capital is adjusted for inflation and then the coupon rate at the coupon payment date is calculated based on the bond yield curve (check BESA for the figures) and then applied to the inflation adjusted amount. Hope this helps, CathJ...
 
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