An index-linked gilt multiplies both its coupon and its redemption by the index ratio, the figure that records how far prices have risen since the gilt was first issued.
A real coupon, scaled into cash
An index-linked gilt is issued with a real coupon: a rate of interest expressed in the prices of the day the gilt was first sold, and fixed for its whole life. That rate is not what the holder is paid, because the gilt's terms also index the amount the rate is applied to. The real coupon is multiplied by the index ratio, and the same ratio multiplies the £100 of nominal repaid at maturity. The rate never changes; the nominal it is applied to does.
Two consequences follow, and they are worth holding together. The first is that the cash a coupon produces rises as prices rise, so the income keeps roughly the purchasing power it had at issue. The second is that the cash is not a fixed number of pounds: no one can state a future coupon at issue, because no one knows the index values the gilt's terms will point at.
Where the ratio comes from
The ratio is one index value divided by another. The base RPI is fixed when the gilt is first issued and never moves again: it is the anchor the gilt's terms are written against. The reference RPI is the RPI for whichever month those terms point at for the payment in question, and that month is set by the gilt's indexation lag — eight months before the payment under one convention on the gilts in issue, three months under the other. The Retail Prices Index is published monthly by the Office for National Statistics; the gilt's own terms are the source for which month applies to it, and the Debt Management Office's gilt data reports restate them alongside each gilt's prices.
Dividing the reference RPI by the base RPI gives a number that stands at 1.00000 on the day the gilt is issued and grows, or shrinks, with measured inflation thereafter. A value above 1 says prices have risen since issue; a value below 1 says they have fallen. The Debt Management Office's reports carry the ratio for each index-linked gilt, and GiltIQ shows it to five decimal places for every gilt in issue — the same precision it uses per cash flow on the gilt's own page, so the list and the schedule cannot disagree about the same payment.
The ratio is the whole mechanism
One multiplication does the work, and setting three illustrative ratios against the same real coupon shows what it does. The figures below are not a quote from any gilt and not a statement about published index values: the real coupon is an illustrative 0.125 per £100 nominal, and the three ratios are chosen to show the mechanism growing from its issue-date anchor.
| Index ratio | Scaled coupon per £100 nominal (0.125 × ratio) | Redemption per £100 nominal (100 × ratio) |
| 1.00000 — the issue-date anchor | £0.12500 | £100.00 |
| 1.35000 — prices up 35% since issue | £0.16875 | £135.00 |
| 1.80000 — prices up 80% since issue | £0.22500 | £180.00 |
Read across a row and the coupon and the redemption move together, because they are scaled by the same number. Read down the first column and the point of the exercise is visible: the real coupon is unchanged at 0.125, and every change in the cash comes from the ratio. That is why a real coupon is described as fixed while the income it produces is not.
The index ratio scales the coupon and the redemption alike. It is also what deflates a clean price that has been quoted with the inflation uplift left in, which is why one figure drives both the cash a holder receives and the price the market shows.
Why the figure is quoted to five decimals
Five decimal places look like more precision than a coupon needs, and on £100 of nominal they are. They earn their place because the ratio has two jobs. The first is scaling the cash a holder receives, where a thousandth of a ratio is a fraction of a penny. The second is converting between the two ways an index-linked price is quoted: a gilt whose terms carry the longer lag is quoted with the inflation uplift already inside the clean price, and the ratio is what takes that uplift back out. Rounding the ratio to two places rather than five can move a deflated price by tens of pence per £100 nominal, and that is enough to move the real yield printed beside it.
Showing one precision everywhere also keeps the site self-consistent: a reader comparing the index-linked list with a gilt's projected cash flows is looking at the same ratio in both, written to the same number of places, rather than at two roundings of it.
What the ratio is not
The index ratio is a fact about published prices rather than a view about future ones. It records how far the RPI has moved between two months, both of which the Office for National Statistics has already published. Anything beyond the last published month is not in the ratio at all, which is why a projection that needs cash flows further out has to add an assumption.
- It is not a forecast: it contains only index values that have already been published.
- It does not fix the cash: the RPI can fall as well as rise, and the Debt Management Office says plainly that index-linked cash flows can therefore fall.
- It is not the same number for two gilts: each has its own base RPI, fixed at its own first issue, so the same month's RPI produces a different ratio on each.
- It does not remove market risk: the price of an index-linked gilt still moves before maturity, whatever its index ratio is doing.
- It is not the whole of a projection: beyond the latest published index figure, the site applies an assumed inflation rate and marks the affected rows as an income estimate, so a scaled figure can be told from a projected one.
Where to see it
The index-linked gilts in issue carries the ratio as a column of its own, at five decimals, beside the clean price, the accrued interest, the dirty price and the real yield. Opening a single gilt repeats it per cash flow on that gilt's schedule, so one payment can be followed from an index value through to pounds.
The par RPI curve answers a neighbouring question rather than the same one. It plots the inflation the market is pricing at each maturity, not the inflation already recorded. Read together, the list says what published prices have done to a gilt's cash and the curve says what the market is pricing for the years still to run.
Background, not advice
This article explains how an index-linked gilt's cash flows are scaled; it is general background, not investment, tax or legal advice for any reader's circumstances. The index values and the ratio come from the Office for National Statistics and the Debt Management Office, which are the primary sources, and every figure in the tables is illustrative with its inputs stated. An index-linked gilt does not remove risk: its cash can fall with the index and its price moves before maturity.