And, it appears that my interpretation was not correct.
Confusingly it doesn't appear that the bonds are yielding RPI+1.25% more like 1.25 * the change in the RPI followed by an RPI adjustment to your capital upon maturity.
Using examples from page 4 and 5 of the Information Booklet:
http://www.nationalgrid.com: Information Booklet
- if the RPI from base to payment point shows an increase of 5.015%% then the 1.25% will also increase by 5.015% i.e.1.25%*1.05 = 1.313%
Against the minimum investment of £2000 this would result in an annual payment of £26.40 or a bi-annual £13.20 rounded to the nearest penny.
There is also the risk that with deflation the 1.25% could be less than 1.25%.
The redeeming element to all this is that upon reaching maturity there is an application of inflation to the original investment so according to the example on page 5 of the document a 5% annual rate of inflation would result in an inflationery increase of 62.905% over 10 years so the minimum £2000 invested would be returned with an additional £1258.20 or £3258.20 in total
So it doesn't quite do what it apparently said on the tin but does get there eventually in a hoped for capital return if held to maturity.
There is an added unknown here of how this might effect the trading price of the bonds in issue as investors speculate over the maturity value which might provide an opportunity to "cash in" inside the 10 years. But, being the first of its kind I am only speculating at how it might behave.
I am not sure that it is for me in its current form as it starts to look a clear 10 year investment and I would probably feel more comfortable holding the shares and, with them, a better understanding of how they might behave.
But, all things being equal, it looks like an alternative to the "guaranteed capital" products that periodically flood the market albeit with a 10 year horizon. The RPI replacing stock market performance that these products sell themselves on whilst guaranteeing your capital. Using the last 10 years as an example you could probably speculate that tieing your returns to RPI would have given you more profit than a stock market investment.
Anyway, the information document can be found below with the example calculations on pages 4 and 5.
I do have to thank the following Motley Fool article (http://www.fool.co.ukAn Inflation-Proof Income And Capital Returns Opportunity), its author Malcolm Wheatley, and the comments made by fellow readers which gave me a much needed moment of clarity.
Related article:
Information booklet:
- http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf
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