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.
