{"id":83906,"date":"2018-01-17T15:35:15","date_gmt":"2018-01-17T15:35:15","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?p=83906"},"modified":"2024-12-18T18:51:23","modified_gmt":"2024-12-18T18:51:23","slug":"gilt","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/share-trading\/share-trading-guides\/share-trading-glossary\/gilt","title":{"rendered":"What is a gilt?"},"content":{"rendered":"

Gilts are a type of investment that\u2019s typically considered to be safer than investing in individual companies. This is because they\u2019re essentially loans that you make to the government. A gilt is simply a word for a UK government bond \u2014 you can also get corporate bonds, which is where you lend your money to companies. During the term of the gilt, you\u2019ll receive income from the gilt, and at the end you\u2019ll get your investment back. Gilts are a little complicated, but they make sense once you know the lingo and how they work \u2014 here\u2019s everything you need to know about gilts. <\/p>

How do gilts work?<\/h3>

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\u2019re basically lending the government money. In return, they give you a gilt, which can be thought of as an IOU (\u2018I owe you\u2019). 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. <\/p>

\n
\n

\n \n \n <\/circle>\n <\/path>\n <\/svg>\n <\/span>\n Gilt jargon explained<\/span>\n <\/h4>\n
\n

There\u2019s some strange jargon used with gilts that you don\u2019t see much in the sector, here are some of the terms you\u2019ll come across with gilts:<\/p>

Nominal value.<\/strong> Also known as \u201cpar value\u201d, this is how much the government will pay back on the redemption date. It\u2019s typically the amount it was originally sold for.
Redemption date.<\/strong> This is a date after the gilt was issued that the government will pay back the loan \u2014 this is usually between 5 and 30 years.
Coupon.<\/strong>. This is the annual interest you\u2019ll receive \u2013 this might change with inflation if it\u2019s \u201cindex linked\u201d<\/p>\n <\/div>\n <\/div>\n<\/div>\n

Gilts are issued in \u00a3100 units<\/strong>, so the nominal value of each gilt will be \u00a3100. 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. <\/p>

Say the government wanted to raise \u00a3100 million, it would issue 1 million gilts at the value of \u00a3100 each.<\/p>

<\/div>

Gilt example<\/h4>

Say you invest \u00a31,000 in a gilt with the name \u201c4% Treasury Gilt 2035\u201d, which is how gilts are typically named. <\/p>

This means you\u2019ll receive 4% of the nominal value<\/strong>(\u00a31,000) every year until it matures. It\u2019s the same as an interest rate.<\/p>

So in this case you\u2019ll receive \u00a340 every year until 2035. In addition to this, in 2035, you will also get back the \u00a31,000 investment in full.<\/p><\/div><\/article>

Why do gilts change in price?<\/h3>

The main thing which influences the price of a gilt is the interest rate.<\/strong><\/p>

If interest rates rise, gilts usually fall in value and vice-versa.<\/strong> 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.<\/p>

Likewise, if gilts are offering poor interest rates, they are less attractive to investors and become much cheaper.<\/p>

\n
\n

\n \n \n <\/circle>\n <\/path>\n <\/svg>\n <\/span>\n An example of how gilt prices change<\/span>\n <\/h4>\n
\n

If gilts are unpopular, you might be able to pay \u00a390 for a \u00a3100 gilt. On the other hand, if demand is high, a \u00a3100 gilt might cost you \u00a3110. Regardless of the purchase price, the gilt coupon is always paid on the nominal value of the gilt, \u00a3100.<\/p>

If you manage to buy a gilt for less than its nominal value, you will get a higher return on your investment.<\/p>\n <\/div>\n <\/div>\n<\/div>\n

What is a gilt yield?<\/h3>

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\u2019s the price paid<\/u> not<\/strong> the nominal value<\/u>.<\/p>

There is what is called an \u2018inverse relationship\u2019 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.<\/p>

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\u2019s appeal to long term investors<\/a>.<\/p>

In short, you probably want a high yield!<\/p>

Can you trade gilts?<\/h3>

You can sell gilts just as you sell stocks and shares<\/a>. 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 \u00a3100 gilt might cost \u00a3110. On the other hand, if gilts are unpopular, you might be able to buy the same gilt for \u00a390.<\/p>

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<\/a>, opening up the possibility to make profit (or loss) on the buying and selling of gilts.<\/p>

Should I buy gilts?<\/h3>

As with any investment, it\u2019s up to you. As always your capital is at risk. Gilts can be profitable, but you can also make a loss.<\/p>

Here are some of the reasons people invest or don\u2019t invest in gilts:<\/p>

  • Safety.<\/strong> The UK Government has never failed to pay back a gilt. It has always paid back the investment and always paid the coupon. There is almost zero risk as the Government is unlikely to default.<\/li>
  • Predictability.<\/strong> Income is regular, as explained above. Once you\u2019ve done the calculations, you can work out almost exactly how much income you\u2019ll receive from a gilt investment. It\u2019s for this reason that gilts make up a significant chunk of many pension fund portfolios.<\/li><\/ul><\/div>
    • Low yields.<\/strong> Especially in the last few years, yields on gilts have slowed. A UK Gilt today offers less than 2% for all terms (from 2 to 30 years). Not a great way to grow savings, let alone achieve substantial capital growth.<\/li><\/ul><\/div><\/div>

      How to buy gilts<\/h3>

      There are two<\/strong> ways to buy gilts.<\/p>

      1. Through the Government\u2019s Debt Management Office (DMO)<\/li>
      2. Through the market, via the Bank of England\u2019s brokerage service. This allows stock to be bought and sold through any main Post Office branch.<\/li><\/ol>

        Types of gilt<\/h3>

        This page has been referring to the most common type of gilt, the conventional gilt<\/strong>. There are other types of gilt, including:<\/p>

        • Index-linked gilts.<\/strong> These take inflation into account, and interest and capital is scaled accordingly.<\/li>
        • Strippable gilts.<\/strong> This means the individual interest and redemption payments of the gilt can be bought and sold separately.<\/li><\/ul>

          Why is it called a gilt?<\/h3>

          The exact definition can sometimes be vague and unhelpful. When most people say gilt, they\u2019re referring to UK Government bonds. While originating in Britain, the term is also used in South Africa and India, and is short for \u201cgilt-edged securities\u201d.<\/p>

          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.<\/p>

          Compare share trading providers<\/h3>

          You could access gilts through gilt exchange-traded-funds (ETFs). These are a type of ETF, so don\u2019t behave like conventional gilts, they\u2019re traded on stock exchanges, so you can invest through a typical trading platform.<\/p>

          \n
          \n <\/div>\n
          \n
          \n