Gilts are a type of investment that’s typically considered to be safer than investing in individual companies. This is because they’re essentially loans that you make to the government. A gilt is simply a word for a UK government bond — you can also get corporate bonds, which is where you lend your money to companies. During the term of the gilt, you’ll receive income from the gilt, and at the end you’ll get your investment back. Gilts are a little complicated, but they make sense once you know the lingo and how they work — here’s everything you need to know about gilts.
Gilts are used by the UK Government to raise money, usually to cover shortfall between public spending and income from taxes, so when you buy a gilt or bond, you’re basically lending the government money. In return, they give you a gilt, which can be thought of as an IOU (‘I owe you’). You can wait until your gilt matures (usually quite a few years) or you can sell it and (hopefully) make a profit, in the same way you would with stocks and shares.
There’s some strange jargon used with gilts that you don’t see much in the sector, here are some of the terms you’ll come across with gilts:
Nominal value. Also known as “par value”, this is how much the government will pay back on the redemption date. It’s typically the amount it was originally sold for.
Redemption date. This is a date after the gilt was issued that the government will pay back the loan — this is usually between 5 and 30 years.
Coupon.. This is the annual interest you’ll receive – this might change with inflation if it’s “index linked”
Gilts are issued in £100 units, so the nominal value of each gilt will be £100. If you buy a gilt from anywhere other than the Debt Management Office then it may have a different nominal value to the amount you paid for it.
Say the government wanted to raise £100 million, it would issue 1 million gilts at the value of £100 each.
Say you invest £1,000 in a gilt with the name “4% Treasury Gilt 2035”, which is how gilts are typically named.
This means you’ll receive 4% of the nominal value(£1,000) every year until it matures. It’s the same as an interest rate.
So in this case you’ll receive £40 every year until 2035. In addition to this, in 2035, you will also get back the £1,000 investment in full.
The main thing which influences the price of a gilt is the interest rate.
If interest rates rise, gilts usually fall in value and vice-versa. If you can get a gilt which offers a better exchange rate than high-street banks do, you can be certain that the demand (and price) of gilts will go up.
Likewise, if gilts are offering poor interest rates, they are less attractive to investors and become much cheaper.
If gilts are unpopular, you might be able to pay £90 for a £100 gilt. On the other hand, if demand is high, a £100 gilt might cost you £110. Regardless of the purchase price, the gilt coupon is always paid on the nominal value of the gilt, £100.
If you manage to buy a gilt for less than its nominal value, you will get a higher return on your investment.
Yield is often confused with the coupon. The yield of a gilt is calculated by dividing the coupon by the price paid for a coupon. That’s the price paid not the nominal value.
There is what is called an ‘inverse relationship’ between gilt prices and yields. If the price of a gilt rises, the yield falls. If the price of a gilt falls, the yield rises.
People like to look at yields over time frames. For example, a 10 year gilt yield, a 15 year gilt yield and so on. This is because of the gilt’s appeal to long term investors.
In short, you probably want a high yield!
You can sell gilts just as you sell stocks and shares. This opens up a whole market of buyers and sellers, looking for the right price.
If gilts are popular, you might have to pay over the odds for one. A £100 gilt might cost £110. On the other hand, if gilts are unpopular, you might be able to buy the same gilt for £90.
People might choose to sell their gilts before maturity and to cash in on the nominal value sooner rather than later. Market conditions cause price to fluctuate, opening up the possibility to make profit (or loss) on the buying and selling of gilts.
As with any investment, it’s up to you. As always your capital is at risk. Gilts can be profitable, but you can also make a loss.
Here are some of the reasons people invest or don’t invest in gilts:
There are two ways to buy gilts.
This page has been referring to the most common type of gilt, the conventional gilt. There are other types of gilt, including:
The exact definition can sometimes be vague and unhelpful. When most people say gilt, they’re referring to UK Government bonds. While originating in Britain, the term is also used in South Africa and India, and is short for “gilt-edged securities”.
Gilt-edged is a phrase used to describe something of the highest quality or value. Originally, gilts were literally gilt-edged certificates and the name has stuck since then.
You could access gilts through gilt exchange-traded-funds (ETFs). These are a type of ETF, so don’t behave like conventional gilts, they’re traded on stock exchanges, so you can invest through a typical trading platform.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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