Spotlight On: National grid RPI-linked bond

The deal

National Grid has launched a retail price index-linked 10-year Bond paying 1.25 per cent above inflation.

The good points

Assuming National Grid doesn't go bust in the next decade and the bond is held to maturity, it could give investors the opportunity to preserve their capital while achieving a rate of return that will keep pace with inflation.

The bad points

It's effectively a corporate bond. If the issuing company goes bust, bondholders are almost last in line for any cash and there's no protection under the Financial Services Compensation Scheme.

Conclusion

National Grid is raising money for future growth but it's among the first firms to turn to normal investors rather than raise cash through wholesale money markets. It hopes people fed up with poor returns on savings – and the withdrawal of NS&I's index-linked bonds last week – will be encouraged to apply before the 26 September deadline. But the bond is less safe than deposit accounts or NS&I bonds.

Plus if inflation falls over the next decade, returns will prove less attractive than are today.