Gilts

Webby

Can someone help me by defining what Gilts are? Am I right in thinking they’re a sort of share issued by the government at a fixed interest which can be brought and sold in the open market.

I've got my Unit 15 simulation and I'm just nervous and I'm worried I'm going to get a question asking about gilts and I just want to have it clear in my head what they are.

Thank you for any help.

sdv

Gilts (golden) are BONDS issued by government. They are called Gilts because the risk of losing money on that BOND is as good as GOLD (ie NONE)

BOND are a loan contract which are marketable in a GILTS market. The Gilts price can go up or down depending on the current rate of interest.

It has an agreed FIXED RETURN on the loan. ie 5% per annum
It has a redemption date -eg loan will be repaid back on 31 December 2025

Because the return is FIXED (£100 @5% = £5 interest) the value of investment can go up or down.

The above gilts will have been issued when the Bank of England Interest rate was 5% in say 5 years a go.

at the THEN market (current) interest rate of 5% on £100 the Investor will get £5 per annum until the redemption date.

Now that the Interest rate has fallen to 1/2% (0.5%), the bond continues to get £5 on £100 invested until 31 December 2025.

The current rate of interest is 0.5% therefore £100 investment will only attract £0.50 in interest.
But to earn £5 in interest an investment of £1000 is required in today's GILTS market.

It follows therefore that £100 GILT @5% in now worth £1000. The initial investment has rised by £900. This has only happened because the market interest rate has fallen from 5% to 0.5%

IF the interest had risen the the value of the initial investment would have FALLEN.