2.19 The GGBs for Section 1 of the Link were issued in three tranches during February 1999 at interest rate margins of between 0.28 and 0.37 of a percentage point above the Government's cost of borrowing in the Gilt market and maturing in 2010 (£1,000 million), 2028 (£1,275 million) and 2038 (£375 million). At fixed rates of interest of 4.5 and 4.75 per cent, these margins implied an extra funding cost of around £80 million over comparable Gilts, even though the risk for investors is identical. The reasons for this apparent disparity are set out in detail by RBC Dominion Securities in Appendix 5 (paragraphs 40-62). In summary, there were two key factors which led bond investors to demand a premium over comparable Gilts:
a) The GGBs at each maturity were small in comparison with Gilts, so there would be fewer opportunities to buy and sell what were regarded as Eurobonds by investors at a fair price in the secondary market for such securities. This relative illiquidity meant that investors would demand a higher rate of interest on the bonds than on Gilts;
b) Despite their relatively small size in comparison with Gilts, the GGBs represented large issues in their own right in the Eurobond market. As a consequence, a further interest rate premium would be required if the entire issue was to be sold to Eurobond investors.