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SA4 x5.1

B

barnie

Member
I'm confused....

The following statistics are given:

Yield on long-dated UK fixed interest govt bonds (FIG) = 4.5%pa
Yield on UK long-dated index-linked gilts (ILG) assuming 5% pa inflation) 1.45% pa

Isn't the implied inflation the difference between FIG and ILG ie (approx) 3%pa?

And if inflation is 5% pa how do you get a salary assumption of 4.5%pa (ie lower?)

Is it a typo or am I missing something obvious?

Thanks
 
Not too sure but I believe they use an assumed inflation rate to calculate the coupons, calculate a gross yield and then a real yield (using the assumed inflation)
That's what the 5% is.
I believe they do this for a few standard rates of assumed inflation, 0%, 5% rather than adjusting to current inflationary expectations.
 
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