Gilts, also known as gilt-edged securities, are essentially IOUs issued by the British government. When you invest in a gilt, you're essentially loaning money to the UK government in exchange for a regular return and the return of your original investment at a set date.
Why Invest in Gilts?
Gilts are known for their low risk. The British government has a very strong track record of repaying its debts, making gilts a safe investment. This stability comes at the cost of potentially lower returns compared to other investments like stocks. However, gilts can provide valuable diversification for your portfolio, as their value often moves in the opposite direction of stocks. This means they can help to offset losses in other areas during market downturns.
Types of Gilts:
There are two main types of gilts:
- Conventional gilts: These are the most common type of gilt. They offer a fixed interest rate (coupon) paid typically twice a year until the maturity date, at which point you get your original investment back.
- Index-linked gilts: These gilts offer protection against inflation. The coupon payments and the amount you get back at maturity are adjusted for inflation, ensuring your purchasing power remains stable.
How to Invest in Gilts:
Gilts can be bought and sold on the London Stock Exchange through a stockbroker or investment platform. They are issued in units of £100 with a variety of maturity dates ranging from a few months to up to 50 years.
Things to Consider:
- Interest rates: The price of gilts and the interest rate they offer are inversely related. When interest rates rise, gilt prices typically fall.
- Liquidity: While generally considered a safe investment, gilts can be less liquid than some other assets, meaning it may take longer to sell them if you need the money quickly.
Bond Yield: The Return on Your Investment
A bond yield represents the annual return you expect to receive on your bond investment. It's expressed as a percentage and is calculated by dividing the annual coupon payment (interest) by the bond's face value (principal amount).
Here's the formula for calculating yield:
Yield (%) = (Annual Coupon Payment) / (Face Value) x 100%
For example, if a bond has a face value of $1,000 and pays a $50 annual coupon, its yield would be 5% (50 / 1000 x 100%).
Important Note:The yield you see advertised may not be the actual return you receive if you hold the bond until maturity. This is because bond prices can fluctuate in the secondary market.
Clean Price: The Bond's Value Without Accrued Interest
The clean price, also known as the settlement price, reflects the actual market value of a bond excluding any accrued interest. This is the price you would pay to buy the bond on the secondary market, where bonds are traded between investors.
The clean price can be higher or lower than the face value depending on current market interest rates. When interest rates rise, existing bonds with lower fixed coupon rates become less attractive, and their clean prices may fall.
Dirty Price: The Bond's Value Including Accrued Interest
The dirty price, also known as the full price, represents the total cost of buying a bond between coupon payment dates. It includes the clean price plus any accrued interest that has accumulated since the last coupon payment.
Here's how to calculate the dirty price:
Dirty Price = Clean Price + Accrued Interest
Accrued interest is calculated daily based on the bond's coupon rate and the number of days since the last coupon payment. It's important to consider the dirty price when buying a bond in the secondary market, as you'll be responsible for paying the accrued interest to the previous owner.
Tracking Gilts in issue using giltsyield.com:
giltsyield.com provides a set of tools to help track Gilts in issue and provide key analytics like bond prices, yields and accrued coupon.
We also let you create your own gilt portfolio performance tracking tool with professional grade analytics to monitor your portfolio risk and performance.
Further Resources:
For more information on gilts, you can visit the following resources:
- UK Debt Management Office: UK Debt Management Office
- Investopedia: Gilt