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NS&I: how much are my index-linked bonds worth?
It's been a year since the last batch of NS&I index-linked bonds was launched. But with inflation slowing, how's your investment looking now?
by Victoria Bischoff on May 17, 2012 at 09:00Follow @VBischoff
It’s been a year since thousands of savers, alarmed at the increasing rate of inflation, began ploughing money into state-owned National Savings and Investments (NS&I)’s last batch of index-linked bonds.
The popular savings bond, which was withdrawn after just four months last September owing to overwhelming demand, offers valuable protection against the eroding effect of inflation.
But now the rate of inflation has slowed, how is the investment doing?
Interest rate confusion
A number of Citywire readers recently expressed some confusion over how exactly the rate of interest on NS&I’s index-linked bonds is calculated.
First, it’s important to understand that NS&I index-linked bonds pay out according to changes in the retail price index (RPI), not the annual inflation rate you see splashed in the headlines. These are two different things.
Each month the Office of National Statistics (ONS) collects prices for a range of goods and services to calculate the RPI. When prices rise, the index rises, and when prices fall, the index falls.
The latest figures show that the RPI hit 240.8 in March 2012, up from 232.5 in March last year – starting from a base figure of 100 in 1987.
It’s worth pointing out that RPI is usually a higher number than the consumer price index (CPI) – the government’s preferred measure of inflation – as it includes housing costs whereas the CPI does not.
Moving onto the annual rate of inflation, this measures the rate at which prices are changing, and is expressed as a percentage. For example, in March this year the rate of inflation was 3.6%, down from 5.3% in March 2011.
However, while the rate of inflation has fallen in the past 12 months, it’s important to remember that prices are still increasing, just at a slower rate. When the rate of inflation drops, it’s called disinflation. This is different from deflation, which means prices – or the RPI figure – have dropped.
Those concerned they will not receive an index-linked interest payment because the rate of inflation is lower than what is was when they bought their bonds, therefore, need not worry yet because the RPI is still increasing.
How the NS&I index-linked bond works
NS&I calculates the interest on an annual basis using RPI figures from the start and end of each investment year – ignoring the monthly changes in between.
More about this:
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