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Gilt-Edged Bond



Definition

A gilt-edged bond refers to an investment in debt issued by a highly rated corporation or government seen as financially stable and reliable. These bonds are considered low-risk investments, and they often come with lower yield rates due to their reliability and safety. The term “gilt-edged” signifies the quality and security of these bonds, akin to gold standard.

Phonetic

The phonetics of the keyword ‘Gilt-Edged Bond’ is: ɡɪlt-ehjd boʊnd

Key Takeaways

Gilt-Edged Bond: Three Main Takeaways

  1. Gilt-Edged Bonds are government bonds – These are high-grade bonds issued by a national government, indicating a debt instrument considered extremely safe because it is backed by the full faith and credit of the governmental entity.
  2. Low Default Risk – As they are issued by the government, Gilt-edged bonds carry with them a low risk of default, making them a stable investment option which often appeals to conservative, risk-averse investors.
  3. Interest rates and bond prices – The price of gilt-edged bonds fluctuates depending on the interest rate. If the interest rate rises, the price of existing bonds with lower interest rates will fall.

Importance

A Gilt-Edged Bond is an important term in business/finance as it refers to a high-grade type of debt, often issued by governments and considered to be a secure investment. These bonds, also called “gilts,” are significant because they’re backed by a creditworthy entity like a financially stable government, which lowers investment risk. As a result, they typically offer lower yields on the assumption that the issuer is unlikely to default. These attributes make gilt-edged bonds a crucial part of diversified investment portfolios, particularly for conservative investors prioritizing capital preservation over high returns. Their stability and security make them an essential reference point in the bond market and for understanding a country’s economic health.

Explanation

A gilt-edged bond, also known simply as “gilt,” is fundamentally a high-grade type of investment-bond offered by a government or a reliable organization that is deemed financially stable. Its purpose is to provide investors with a method of earning a secure, albeit low, return on investment. Typically, gilt-edged bonds are issued by national governments in their own currency, making them highly reliable and almost risk-free investment avenues for investors. These bonds are usually considered an ideal choice for risk-averse investors seeking low-risk and secured investment strategies.Gilt-edged bonds function as an integral tool for governments to raise funds needed for various public sector projects or to manage national debts. By issuing these bonds, governments are borrowing money from investors with the promise to pay a fixed interest rate for a set amount of time and to return the principal amount when the bond reaches maturity. For investors, buying these bonds translates into lending money to the government in return for a predictable income stream and a guaranteed return of their initial investment. Hence, gilts offer a method of preserving capital while generating steady income, serving as a preferred choice for both institutional and individual investors.

Examples

1. UK Government Bonds: Also known as UK Gilts, these are bonds issued by the UK government as a means of borrowing money. They are considered extremely low risk because they are backed by the UK government, which is highly unlikely to default on its payments. 2. US Treasury Bonds: Similar to UK Gilts, US Treasury Bonds are issued by the US government. They are also considered gilt-edged bonds due to their low risk and guaranteed return, since they are backed by the full faith and credit of the US government.3. German Federal Bonds: Also known as Bunds, these are issued by Germany’s Federal Government. Highly secure, Bunds represent one of the safest investments available on the market, thus qualifying as gilt-edged bonds.

Frequently Asked Questions(FAQ)

What are Gilt-Edged Bonds?

Gilt-Edged Bonds are high-quality investment-grade bonds issued by government entities or some top-rated corporations. These bonds are considered to be low risk and have a lower yield compared to other bonds.

Why are they called ‘Gilt-Edged’?

The term ‘gilt-edged’ refers to the golden edges of bond certificates, symbolizing their high quality and low risk.

What makes Gilt-Edged Bonds a safe investment?

Given that these bonds are usually issued by highly credible issuers like governments or blue-chip firms, the investor can be assured of receiving their interest payments and return of principal at maturity.

What is the typical maturity period for Gilt-Edged Bonds?

Gilt-Edged Bonds usually have long maturity periods. They can mature from a period as short as one year to as long as thirty years.

How is the return on Gilt-Edged Bonds?

Since Gilt-Edged Bonds carry a lower risk, the return, or yield, on these bonds is generally lower than that of riskier, lower-graded bonds.

Are Gilt-Edged Bonds tax-free?

The tax treatment of Gilt-Edged Bonds depends on the issuer and local legislation. For example, in some countries, bonds issued by the government may be tax-free.

Can I sell my Gilt-Edged Bonds before maturity?

Yes, Gilt-Edged Bonds can be traded in the secondary market before their maturity.

Who should invest in Gilt-Edged Bonds?

Gilt-Edged Bonds can be a solid choice for conservative investors seeking a regular income with minimal risk, such as retirees or those nearing retirement. However, all investment decisions should be based on one’s individual financial circumstances and goals.

What happens if the issuer of my Gilt-Edged Bond defaults?

While it’s rare for issuers of Gilt-Edged Bonds to default, it can happen. If it does, the investor may lose part or all of their investment. However, because these bonds are typically issued by governments and top-rated corporations, the risk of default is generally lower compared to other types of bonds.

: How can I buy Gilt-Edged Bonds?

: Gilt-Edged Bonds can be purchased through investment brokers or financial institutions, either at issuance or on the secondary market.

Related Finance Terms

  • Government Securities
  • Investment Grade Bond
  • Debt Security
  • Low-Risk Investment
  • Yield to Maturity

Sources for More Information


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