Cash Management - Gilts ?!?

Rachie278

I'm starting to think its an error in my BPP book, but I really can't grasp Gilts?!

'Gilts prices are quoted in the financial press every day and are priced for every £100 stock. For example, on 16 December 20X7 the quoted price for Treasury 4.25% 20X9 was £104.12. This means that £100 of the gilts cound have been purchased for £104.12 on 16 December 20X7

The gilts will be redeemabe in 20X9 at their nominal value of £100 and as the maturity date moves clsoer the gilt price will move towards £100'

:huh:

Should that last bit mean the gilt price will move towards £104.12? If not, then, to be honest, Gilts are as clear as mud to me!

Any plain english help would be very gratefully received!

Rachel:confused1:

liveprincess

never heard of this when I studied CMGT few months ago...

Nps

I don't know much about Gilts except for what I learnt when I did the exam, but from my understanding.....

The Gilt value is the amount which you will get on the redemption date. This may or may not be the price you actually pay to purchase it. You will then receive the interest at the rate shown in the Gilt name (paid in two instalments at 6 monthly intervals).

The price paid for the Gilt depends on the current interest rates, if the rates are higher than the interest shown on the Gilt, you are likely to pay less than the face value of the gilt (think of it as incentive to buy the gilt as otherwise it would be a poor investment as you'd be better off putting the cash into the bank). The upshot is that you are guaranteed to get more back at redemption than you paid for the Gilt originally.

Similarly, if interest rates are low, and the rate of the Gilt is high, you will pay more than the redemption value as you are guaranteed a high rate of interest, yet this is offset by knowing you will get less than you paid when you redeem the Gilt.

So, in your example, the price of a £100 Gilt is likely to get closer to £100 the nearer to its redemption date, as there will be less interest payments paid out, so any particularly high or low rates will make less of a difference.

I'm sure this is a very simplified description of Gilts, and I can't even guarantee that what I've said is correct, but that's how I understood them to work. I'm sure someone will correct me if I'm wrong!

SarahJS

NPS puts it really well I think

imtiaz

Hi

I recently completed cash management. I used the kaplan book only to study for it. I can safely say from going through the book 3 times, the practice CBTs twice each, and my own exam, that level of information regarding gilts in your bpp book is more than likely overkill and not required for cash management.

What seemed to be required for gilts was (totally based on my personal study) an understanding of what gilts actually are, and not calculations. So I would say you're pretty safe ignoring the calculation side of gilts for cash management and focus more on who issues gilts, can they be sold in markets etc etc.

Rachie278

I'm sorry I don't know how to thank posts, but thanks for all the responses, particularly NPS! :thumbup1:

I'm still waiting for the lightbulb moment regarding Gilts, but i'm hoping like imtiaz said, I won't really require gilt knowledge :laugh:

Thanks again

Rachel

Nps

There's a little green button at the bottom left of each post for thanks (for future reference!)

I would also agree with Imtiaz about what knowledge of Gilts is required.

Rachie278

Thanks NPS! Don't know how I didnt notice the thanks thingy before!

Jules18

All Treasury Stock are issued at a nominal value of £100 because this is the redeemable value at the end of the life eg 2015. Remember they are called Gilts because the Treasury Bonds are gilt-edged

The reason the price varies is because if you can sell a Gilt which has a number of years to redemption then the person purchasing it will also get the £100 value plus any interest that will be paid. Put simply if it is 5% with 4 years to go then you will get back £20 interest and £100 so you might sell it for £110 giving both you and the buyer a profit.

The closer it gets to redemption date the less interest is earned and therefore the closer to nominal value it becomes.
It is a bit more complex in real life with three different rates in progress but I hope this helps a little.