Gilt Edged Securities (Gilts)

What are Gilts?

Gilts, short for Gilt Edged Securities, are bonds issued by the UK Government with a fixed interest rate for a predetermined length of time.

Often used by the Government to raise state cash when public expenditure exceeds income, they are subject to the same fluctuations in value as shares, but are commonly viewed as the safest of investments because of their Government backing and low risk.

A gilt that reaches maturity (i.e. the end of its term) will repay its capital value at the time of investment. They are therefore best suited to investors who seek a predictable fixed income with a guaranteed return. However, it is worth remembering that gilt investment funds and gilts traded in the market do not offer the same guarantees.

Gilts are issued by the Treasury and in most cases the investor hands over the money and then receives a fixed rate of interest for the life of the gilt. When the gilt matures, its capital value is repaid at par value. Gilts are bought at their par value or at face value, usually £100. They can be traded on the stock market or purchased through the National Savings Stock Register when they are first issued.

Their value will be affected by inflation, other types of investment available and the remainder of time left until maturity. The optimum time to purchase Gilts is when interest rates are high and are on the brink of falling. As interest rates fall, the value of the stock will rise and therefore can be sold at a profit.

The gilt market is split into three classifications, according to their redemption date or maturity, classified as:

  • Shorts (less than five years)
  • Mediums (five to fifteen years)
  • Longs (more than fifteen years)

Undated gilts pay an ongoing low interest rate and have no redemption date. The government has the option to repay these but their low interest rate makes it unfavourable to do so.

Index linked gilts are linked to the rate of inflation, as their name might suggest, and are useful for investors who are concerned that inflation might devalue of their investment.

Thus far, there has never been a time when the Government has failed to repay a gilt, therefore they are a suitable alternative to cash in an investment portfolio. Any well-advised and diversified portfolio should have an element of fixed interest securities, depending on the investor's position on taking risks and the current market conditions.

Gilt prices are directly connected to the level of interest rate, so as interest rates rise, gilt prices fall. This keeps them in competition with fixed rate alternatives. Long gilts tend to see more fluctuations in their prices, whereas because investors are aware that short gilts will be repaid soon, the price gradually moves closer to par value.

Gilts do not attract capital gains tax, but they are subject to income tax. Hence they will be a less attractive investment for those who pay a higher rate of income tax.

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