United Kingdom linkers

Index-linked gilts, like all other linkers covered in this chapter, are known as capital indexed bonds, where the income and principal are adjusted for changes in a consumer price index, subject to a lag. In the United Kingdom, the index is the RPI and the lag is eight months. The market trades on a clean price basis, with the quoted price a cash price (not a real price), including inflation accretion. 

Here, and in the complexity of the real yield calculation, the United Kingdom suffers perhaps for being the prototype linker market. An eight-month lag is needed in order to always know with certainty the future money, or cash, value of the next coupon, so that the money value of that coupon can be accrued. The major innovation of the Canadian model is the use of a formula that accrues coupons on a real basis, removing the need to know precisely what will be paid in cash terms on the next coupon day. 

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