Tuesday, 1 February 2011

Gilts - Government Bonds (UK)

Fixed income government securities, such as UK 'gilts' form part of the DIY Income Investor strategy (as part of Level 5 of the Income Pyramid - for more sophisticated DIY investors). However investing in gilts (within a UK ISA) may seem confusing for many new investors. 

Monevator has recently published an informative introductory guide to gilts, which explains how they work.

The key points are:
  • they are pretty safe (as they are guaranteed by the government)
  • there are two types: those with a maturity/redemption date and those that are undated/perpetual
  • the market price fluctuates (primarily driven by interest rate expectations)
  • you can buy them in an ISA, if they have at least 5 years to run before maturity
If you buy a gilt with a redemption date, although the market rate will fluctuate, you will know:
  • what 'coupon' (interest) you will get each year to redemption
  • how much capital you will get back at the redemption date
If you buy an undated gilt, there is no way to know how much you will be able to sell it for eventually (although you will know what coupon you will get each year) - so you have no guarantee that you will get back what you paid for it.

I've described in a previous post how you can find information on yield on Bondscape.

You can do more DIY research at the government's Debt Management Office.



I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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