Gilts

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Gilts

What are Gilts?

Gilts or gilt-edged securities are loans to the government which are traded on the stock market like stocks and shares.

The government borrows the money at an agreed rate of interest known as the coupon (although some gilts are inflation-based) until a specified redemption date. Gilts are more like government investment bonds than stocks and shares.

Redemption dates can be set at:

• short term (within 7 years)
• medium (7-15 years)
• long term (Over 15 years)

The investment will then be repaid at the agreed date. Undated gilts are also available - they pay interest but have no fixed redemption date.

What do they cost?

Gilts can be bought and sold via a broker who will charge commission. Many companies will arrange this online . They will be referred to as having interest, current or running yields either above or below `par'. This is calculated based on the price required to obtain £100 of stock. If you buy gilts `over par', you expect to receive a higher level of interest.

One way to compare gilts is to look at the gross redemption yield which shows the total income and capital growth until redemption.

What are the risks?

Unlike shares, gilts carry a low level of risk. Provided the investment is held until redemption, when the government will repay the loan together with the agreed interest. As they are traded on the stock market though, the value of these investments rise and fall. It is therefore possible to make a profit by selling in a rising market rather than waiting for the redemption date.