In the United Kingdom ‘gilts’ were originally debt securities from the Bank of England with gilded edges, hence the name. The term is used throughout modern Commonwealth nations, but is most generally associated with the UK.
Most modern gilts in the United Kingdom are held by insurance companies and pension funds, and account for around thirty percent of government debt. Anyone who wants to diversify their business portfolios and return on their investments in a secure manner should consider saving bonds of this type.
Gilts are among the simplest government bonds in the United Kingdom: holders receive fixed amounts twice a year until the bonds mature, and then the holder receives the principal. They are widely viewed as safer than other types of government bonds, particularly in troubled economic times and can be thought of as loans to be repaid after their investment periods are over.
As the government is unlikely to default on their debt, they are generally regarded as safe investment choices. The United Kingdom government in particular has an excellent track record for honouring its debts.
The investment periods of gilts can be extremely variable. Some bonds can have maturity dates of fifty years, whereas others may only be for one year, although they are usually for periods of between five and thirty years. There are also some undated gilts, which have no fixed maturity date, but these now account for a very small proportion of the UK government’s debt.
The fixed interest or coupon payments on the gilts are usually paid every six months, and you can immediately tell what the coupon rate and the maturity date are by the naming of the gilt. For example, the 4¼% Treasury Gilt 2027 has a 4¼% coupon rate, i.e. it pays £4.25 per annum, split into two payments, for every £100 of gilt held, and matures in the year 2027.
Many gilt holders will sell them before they reach maturity, and this course of action doesn’t generally incur any additional charges. However, as with all investment decisions, it is advisable to speak with a qualified financial planner or financial consultant for any professional advice. Anyone considering investing in gilts can look at direct investment into the gilt market or an indirect investment through gilt funds.
As the government’s funding plans can change substantially over the course of decades, there are times when it may be more or less economical to sell gilts rather than hold them until maturity to receive repayment of the nominal amount.
The value of gilts can rise and fall with the stock market, since they can be bought and sold there, although the main drivers of the price of a gilt are the interest rate or coupon payable relative to general interest rates, and how close the gilt is to maturity.
For gilts with some time to run, if the interest rate is more attractive than general interest rates, it is likely to trade at a premium, i.e. higher than the nominal value of the gilt, and the opposite is true when the coupon rate on the gilt is less attractive than general interest rates, i.e. it will sell below the nominal value.
It is important to work out the interest payments that you will receive until maturity and the nominal value that you will receive to ensure that you will not make a loss on any investment, especially if you decide to invest in a gilt where the price is trading above the nominal value.