understanding index linked gilts

[imasavernow]

Hi
I'm a newbie and can't find a guide to index linked gilts anywhere on the net. I am trying to understand the yields.
For instance, at present the Gross Redemption Yield on UK 2.5 % 2013 is around 3.06%. My understanding is that the assumed rate of UK inflation is 3%.
So does this mean that the real yield is only 0.06% ? Or is the total yield 3 + 3.06= 6.06% ( I think not). Or is the 0.06% the yield on the capital and the interest is extra?

thanks

 

[fibonelli]

UK Debt Management Office

Make sure you understand what happens when inflation goes below 0%.

 

[imasavernow]

i am aware that if inflation goes -ve then so does the gilt but i still can't figure out exactly what a 3.06% GRY really means. Is it a real rate of 0.06% if inflation is 3%?

 

[Supermu]

I'm finding it difficult to understand gilts... I'm actually finding myself really daft. What happens when interest rate hits 0%? I don't know... If I think the UK is at risk of defaulting, I should demand higher interest for my money... Is interest = yield? *&*(& this is doing my head in... And no place explains this very well... Hope someone can explain.