Table of Contents

Gilts



Definition

Gilts are bonds that are issued by the UK government as a way of borrowing money from investors. They are considered low-risk investments because they are backed by the government, which is highly likely to repay its debt. These bonds are called gilts because the original certificates were gilt-edged.

Phonetic

The phonetics of the keyword “Gilts” is /ɡɪlts/.

Key Takeaways

<ol><li>Gilts are UK government bonds which are issued by the HM Treasury and listed on the London Stock Exchange. Being government-backed, they are considered to be secure investment options with minimal risk.</li><li>Gilts come with a maturity date and the government pays an annual interest rate, or ‘coupon’ , to the bondholder until the bond matures. The interest rate can be fixed or variable.</li><li>Investors consider gilt funds as a part of their portfolio to balance risk, particularly during volatile market conditions. However, they need to be aware of the potential impacts of inflation and interest rate changes on their gilt investments.</li></ol>

Importance

Gilts are important in business and finance because they are considered a highly secure form of investment. Gilts, which are bonds issued by the UK government, provide a fixed rate of interest over a predetermined time period. This makes them a desirable choice for investors looking for a reliable and low-risk investment option, particularly during volatile economic times. Moreover, they are often used by fund managers as a benchmark to measure the performance of investment funds. Thus, understanding and investing in gilts is crucial for diversification of the investment portfolio and for maintaining a balance between risk and return.

Explanation

Gilts, predominantly used in the United Kingdom, are bonds that are issued by the government to finance its budget deficits and public spending projects. They serve the dual purpose of resource mobilisation for the government and providing a relatively safe and secure investment option for investors. Like any other government bonds, gilts are considered to be lower risk when compared to corporate bonds or equities, primarily because they carry the government’s obligation to repay the debt and the respective interest. Hence, they’ve become a crucial part of diversified investment portfolios for individual and institutional investors seeking steady income with minimal risk.Additionally, gilts play a vital role in monetary policy implementation. The central bank can buy or sell government gilts to influence the amount of money circulating in the economy. By purchasing gilts, the central bank infuses money into the economy, thereby aiding in monetary easing, whereas selling of gilts helps to mop up the excess liquidity. The yield from the gilts is also considered a benchmark for pricing corporate bonds and loans. The good credit rating of the British government, along with the liquidity of gilts in the market, makes them a preferred investment vehicle for investors looking for a balance of safety, liquidity and returns.

Examples

1. 10-Year UK Government Bond: An example of a gilt in the real world is the 10-year UK Government Bond. This is a bond issued by the British government that promises to pay a fixed interest rate every six months for 10 years. At the end of the 10 years, the investor will get their original investment back. This is an extremely safe investment because it is backed by the British government.2. Treasury Bills: In the U.S., similar securities to gilts are called Treasury bills, notes, and bonds, all of which are debt obligations of the U.S. government. These are considered almost as safe as cash due to the strong economy of the U.S. and its reliable payment of interest and principal on these securities.3. Japanese Government Bond: Another example is the Japanese Government Bond (JGB), which is a debt security issued by the government of Japan. The government pays interest on the bond until the maturity date, at which point the bondholder receives the bond’s face value. Like gilts, JGBs are also perceived to be low-risk due to the backing by the Japanese government.

Frequently Asked Questions(FAQ)

What are Gilts?

Gilts, also known as gilt-edged securities, are bonds issued by the British government. They are considered low-risk investments because they are backed by the government.

Why are they called Gilts?

The term gilt originally referred to the golden edges of the bond certificates, which have a gilt or gold edge. It has since become a term signifying any UK Government securities.

How do Gilts work?

When you buy a gilt, you are essentially lending money to the British government. In return, you receive a fixed rate of interest twice a year until the bond matures, at which point you also receive the original investment back.

What are the different types of Gilts?

There are three types: Conventional Gilts, Index-linked Gilts, and Double-dated Gilts. Each has its unique characteristics in terms of interest payments and maturity dates.

Are Gilts a good investment?

As with any investment, it depends on personal circumstances and market conditions. Gilts are generally considered low risk as they guarantee income, however, they may not offer as high a return as other more risky investments.

Can you sell Gilts before they mature?

Yes, Gilts can be bought and sold in the secondary market at any time between their issue and maturity dates.

What happens if I hold my Gilt to maturity?

If you hold your gilt to maturity, you will receive the final coupon payment and the original investment amount, also known as the principal, from the UK government.

How are Gilts taxed?

Interest income from gilts is subject to income tax, and if sold for a profit, may be subject to capital gains tax. However, gilts are free from taxes in certain types of accounts like ISAs and pensions.

Where can I buy Gilts?

Gilts can be bought direct from the UK Government through the UK Debt Management Office or through a broker.

Are Gilts affected by interest rates?

Yes, like all bonds, the price of Gilts can be affected by changes in interest rates. If interest rates rise, the price of existing Gilts tend to fall as newer bonds offer higher rates.

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