An index-linked gilt's coupon and redemption are scaled by the index ratio, so an index-linked rung's real income is stated in present-day terms and its cash grows with published inflation rather than staying fixed.
What an index-linked gilt pays
An index-linked gilt is built to keep pace with inflation. Instead of paying a fixed cash coupon, it pays a real coupon — a rate quoted in present-day prices — that is then scaled by an index ratio, so the pounds it pays grow as prices rise. The redemption is scaled the same way: an index-linked gilt returns more than its nominal if prices have risen since it was issued, and it returns its nominal scaled by the index ratio at maturity. The real coupon is fixed; the cash it produces is not. That is the whole reason to build an index-linked rung: it turns a fixed promise into one that keeps its value, so a reader's later years are not quietly eroded the way a conventional ladder's would be.
For a ladder, an index-linked rung works the same way as a conventional one — it is a gilt maturing in its year band — but its cash is inflation-adjusted. That makes it the natural rung for a reader who wants the purchasing power of each year's draw to hold, rather than a fixed number of pounds that buys less as prices rise.
The index ratio
The index ratio is the figure that does the scaling. It tracks how far prices have risen since the gilt was issued, and it multiplies both the real coupon and the redemption. An index ratio of 1.35 means prices are 35 per cent higher than at issue, so both the coupon and the principal are scaled up by that factor. The ratio moves with published RPI, so the cash an index-linked gilt pays is set by the inflation that has been published, not by a forecast.
Real income versus nominal income
An index-linked rung is described in real terms — the income in present-day prices — and pays in nominal terms that rise with inflation. Where a conventional rung pays a fixed nominal income whose real value erodes, an index-linked rung pays a nominal income that grows with prices, so its real income holds roughly level. A ladder projection beyond the published index ratio has to assume some future inflation to estimate the nominal cash, and that assumption is the reader's or the page's, not a forecast. Up to the published index ratio the figure is a fact; beyond it, an estimate. The published index ratio is a fact the page can state; anything beyond it rests on the assumption entered, which is what makes the estimate honest rather than a prediction.
Building an index-linked rung
The table is an illustration and not a quote from any gilt. It takes a notional index-linked gilt with a 0.125 per cent real coupon, an index ratio of 1.35 and a £10,000 nominal holding, and shows how the real figures become nominal cash. The 0.125 per cent and 1.35 are illustrative inputs; the arithmetic is exact.
| Measure | How it is worked out | Illustrative value |
| Real coupon per £100 | Fixed at issue | £0.125 |
| Index ratio | Prices since issue | 1.35 |
| Nominal coupon per £100 | £0.125 × 1.35 | ≈ £0.169 |
| Nominal annual coupon on £10,000 | £10,000 × 0.125% × 1.35 | ≈ £16.88 |
| Redemption on £10,000 | £10,000 × 1.35 | £13,500 |
The real coupon is £0.125 per £100, which on £10,000 nominal is £12.50 a year in issue-date prices. Scaling that by the index ratio of 1.35 gives about £16.88 of nominal coupon a year, and scaling the £10,000 nominal by the same ratio gives a £13,500 nominal redemption. As prices rise further, the index ratio rises, and both the coupon and the redemption with it — the rung's cash grows, while its real income stays roughly where it started.
What an index-linked rung does not do
- It does not pay a fixed cash income: the cash grows with published inflation.
- It does not forecast inflation: the index ratio uses published RPI, and a projection beyond it assumes a rate.
- It does not start at a high real coupon: index-linked real coupons are typically low.
- It does not remove interest-rate or market risk; its price still moves before maturity.
The trade-off is explicit: an index-linked rung gives inflation protection at the cost of a low starting real coupon, whereas a conventional rung gives a higher fixed coupon that inflation erodes. The index-linked gilts page lists the linkers with their real coupons and yields, and the bond ladder designer treats an index-linked rung the same way as a conventional one, sizing it to fund its year's draw. A reader comparing the two is comparing how much starting income to give up for protection against the erosion of a fixed one.
Background, not advice
This article explains how an index-linked rung's coupon and redemption are scaled by the index ratio, and what that means for real and nominal income. It is general background on how the figures are put together, not investment, tax or legal advice for any reader's circumstances. The 0.125 per cent real coupon and 1.35 index ratio above are illustrative, and any inflation assumed beyond the published index ratio is an assumption, not a forecast. The primary source for a real index ratio and RPI figure is the Office for National Statistics, and for a gilt's terms the gilt's own record and the Debt Management Office.