Before you readCapital at risk. The value of investments and any income from them can fall as well as rise, and you may get back less than you invest. This is information, not advice.
In one paragraphA gilt is a bond issued by the UK government. It usually pays a fixed amount of interest twice a year and repays its face value on a set date. Gilts are generally regarded as one of the lower-risk areas of the bond market, but their price still moves, and lower risk is not no risk.
Gilts get their name from the gilt edges of the paper certificates the government once issued. Today they exist only electronically, but the promise is the same: the UK government borrows your money for a set time, pays you interest, and repays you at the end.
Who issues gilts, and why?
The government spends more than it raises in tax most years, and it borrows the difference. The UK Debt Management Office sells gilts on the Treasury's behalf, mostly by auction to large institutions. Once sold, gilts are bought and sold between investors every working day.
How does a gilt pay?
Gilts are priced per £100 of face value, called the nominal. Most pay their interest in two equal halves, six months apart. A gilt's name tells you its coupon and the year it is repaid.
| You hold | £1,000 nominal |
|---|---|
| Coupon | 5% a year |
| Paid every six months | £25 |
| Paid each year | £50 |
| Repaid at maturity | £1,000 |
The same £1,000 example as chapter I, with the £50 a year paid in two halves.
What does a gilt cost to buy?
Almost never exactly £100 per £100 nominal. A gilt issued years ago with a low coupon trades below £100 when new gilts pay more, and one with a high coupon trades above £100 when new gilts pay less. Chapter V shows why.
You will also see two prices quoted. The clean price leaves out the interest that has built up since the last payment. The dirty price includes it, and it is what you actually pay. The seller is paid for the interest they have earned so far.
What is the difference between conventional and index-linked gilts?
A conventional gilt pays a fixed amount of interest and repays a fixed amount at the end. The £1,000 example is a conventional gilt.
An index-linked gilt adjusts both its interest and its repayment in line with inflation. If prices rise, the payments rise with them. That protects what the payments can buy, but index-linked gilts can still fall in price, sometimes sharply, when interest rates rise.
Can a gilt lose value?
Yes. If you sell before maturity, you get the market price on that day, which may be less than you paid. The longer a gilt has left to run, the more its price moves when interest rates change. A gilt with thirty years left can fall much further than one with two.
If you hold a conventional gilt to maturity, the government promises to repay its face value. What that money will buy by then depends on inflation, which is covered in chapter VII.
How are gilts taxed?
For individuals in the UK, gains made on gilts are free of Capital Gains Tax, as GOV.UK sets out. The interest is taxable as income, unless the gilt is held inside an ISA or a pension. Tax treatment depends on your own circumstances and can change in future.
How do people buy gilts?
Most people buy them through an investment platform or a stockbroker, either as individual gilts or through a fund that holds many. Our Where to invest page explains the accounts people use.
What about other governments?
Every large economy borrows the same way. Their bonds carry different risks.
- Developed-market governments, such as the United States, Germany and Japan, are generally regarded as lower-risk borrowers because of the size of their economies. Bonds in another currency add currency risk for a UK investor.
- Local and regional governments borrow for schools, roads and other projects. In the United States these are called municipal bonds.
- Agencies and international bodies, such as the World Bank, borrow to fund their own programmes. Some are backed by governments and some are not.
- Emerging-market governments usually pay more, because their economies are less developed and the risk of not being repaid is higher.
Governments are one kind of borrower. The next chapter is about the other: companies.