Each rung of a GiltIQ ladder is sized so its redemption principal funds that year's income draw while its coupon arrives as extra income, which is why the reinvestment of each maturity — not the coupon — is what keeps the ladder running.
Two kinds of cash from each rung
A rung of a ladder produces two different kinds of cash. While the gilt is held it pays its coupon, the fixed interest per £100 of nominal, twice a year. When it matures it returns its £100 per £100 nominal — the redemption principal — and stops. The two are not the same money: the coupon is income the gilt pays along the way, and the redemption is the capital coming back at the end. Because they are taxed differently — the coupon is income and the redemption is capital — the split is not bookkeeping; it decides which figure a tax band touches and which a ladder's draw leans on. A redemption-funded ladder is built around the second of these, sizing each rung so its redemption funds the year's draw.
How the rung is sized
On the bond ladder designer a rung buys the conventional gilt whose maturity lands in its year band, in a nominal quantity sized so that gilt's redemption at par funds that year's inflation-uplifted draw. The rung's coupon is not counted toward the draw; it arrives as extra income in addition. That choice is what makes the ladder a set of maturing gilts rather than a set of coupon streams, and it is why a higher tax band does not enlarge the ladder — the draw is capital, and the band applies to the coupons, not to the redemption. Because the sizing is driven by redemption rather than coupon, the ladder does not need every rung to pay the same coupon; it needs every rung to return the principal its year asks for.
The reinvestment decision
When a rung matures, its principal returns as cash. Whether and where to reinvest it is a decision, not an automatic step. Reinvesting the returned principal at the far end of the ladder keeps the spacing intact — one rung maturing a year — and lets the ladder keep its shape. But the new rung is bought at whatever price and yield the market then offers, which may be better or worse than the gilt it replaces. That is reinvestment risk: the ladder fixes the maturities in advance but not the terms on which each returned principal is redeployed.
- A coupon pays income while the gilt runs; a redemption returns capital once.
- The rung is sized so its redemption funds the year's draw; the coupon is extra.
- Reinvesting a returned principal at the far end keeps one rung maturing each year.
- The rate available when a rung matures is not known in advance — that is reinvestment risk.
Leaving a returned principal uninvested is a choice too: the ladder then shortens by a rung and its later years are funded by fewer gilts. Keeping the ladder running therefore asks for a decision at each maturity, taken on the terms available at that point rather than fixed in advance.
A three-rung illustration
The table is illustrative and not a quote from any gilt. It shows a three-year ladder built from a £30,000 lump sum, with each rung buying £10,000 nominal at par of a notional 4.00 per cent gilt, so each rung's redemption is £10,000 and each year's draw funded by redemption is £10,000. The coupons shown are what the still-running rungs pay in each year.
| Year | Coupon income from running rungs | Redemption that year | Draw funded by redemption |
| 1 | £1,200.00 | £10,000.00 | £10,000.00 |
| 2 | £800.00 | £10,000.00 | £10,000.00 |
| 3 | £400.00 | £10,000.00 | £10,000.00 |
| Total | £2,400.00 | £30,000.00 | £30,000.00 |
In year one all three gilts still run, so the coupons total three times £400, or £1,200. In year two the first has matured, leaving two gilts and £800 of coupon. In year three only the last gilt remains, so £400. The redemptions return the £30,000 of capital a rung at a time, and each year's £10,000 redemption funds that year's draw; the coupons, £2,400 over the three years, are income arriving beside it. When the year-one rung matures, its £10,000 returns as cash to be reinvested if the ladder is to continue.
The cash flow and the internal rate of return
Because the ladder mixes coupons and redemptions, the cleanest measure of what a set of holdings has actually produced is the cash flow itself. The portfolio cash-flow page lists each dated payment and repayment, and the internal rate of return — the IRR since inception — is computed from the actual money in and out of the portfolio, carrying no tax adjustment of its own. It answers what the cash flows have produced whatever the tax treatment around them, which is a different question from what a single gilt's redemption yield answers.
Background, not advice
This article explains how a redemption-funded rung is sized and why reinvesting each maturity is the decision that keeps a ladder running. It is general background on how the figures are put together, not investment, tax or legal advice for any reader's circumstances. A ladder spreads maturities across years but does not remove interest-rate or market risk, and the rate at which a returned principal can be reinvested is not known in advance. The figures above are illustrative and state their inputs; the primary source for a real gilt's coupon, price and maturity is the gilt's own record and the day's market data.