Gilts

Gilts, sometimes referred to as British Government bonds, are a way for the Government to raise money from large financial institutions like pension funds and from private investors like you and me. The money is needed by the Government because the Treasury so often finds that its outgoings (to pay for things such as road building and unemployment benefit) exceed its income (from things such as taxation).

To make matters a little more potentially confusing gilts are sometimes referred to as 'gilt edged securities' or 'bonds' or 'fixed interest securities'.

In any event, gilts are issued by the Treasury and in nearly all cases the investor hands over his cash and then receives a fixed rate of interest for the life of the gilt.

When the gilt matures, its capital value is repaid at par value.Gilts are bought at their par value or at face value. This is usually £100.

Most are 'dated' which means that at a fixed date in the future, an amount of money (the par value) will be repaid to the investor.

Gilts tend to be categorised into three categories or time frames. They are:

short dated gilts ('shorts') - these have a life of up to 5 years.

medium dated ('mediums') - these have a life of 5 - 15 years.

and long dated ('longs') - have a life of 15 years or more.The rate of interest paid by a gilt is referred to as the 'coupon'. It is usually paid every six months and is often expressed as a percentage of the par value. So for example, a gilt could be called 10% Treasury Stock 2004. This would mean it pays a coupon of 10% and matures in 2004, making it a 'short' dated issue. The word 'Treasury' is used merely to identify the gilt, and for no other reason.You may purchase gilts when they are first issued but they are also traded on the stock market. Their prices are quoted in leading newspapers. For example, in the share section of the Financial Times, gilts are listed under the section 'British Funds'.Taking the example of the 10% 2004 stock mentioned above, while the coupon is paying 10% of the par value, because interest rates have fallen generally, the traded price of the stock has risen. This means that to purchase it in the market you would have to pay more than the par value, effectively reducing the yield to you because the capital you would receive holding the stock to its redemption date would be lower than your purchase price.To buy and sell gilts, you should consult a stockbroker.Alternatively, contact the National Savings Stock Register (NSSR), either direct or through the Post Office. Gilts purchased through the NSSR pay interest gross, that is without deducting any income tax. Gilts are, except for very large investors, not liable for tax on capital gains.

See also: Gilt Strips Guide to Bonds

Last Updated: August 2007 © Moneyextra.com

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