Government Bonds (Gilts)
When the UK Government needs to borrow money they normally issue a bond. As the Bank of England is considered one of the safest institutions, these bonds are commonly known as Gilt-Edge Securities or Gilts for short.
An example of a Gilt is “UK Gilt Treasury 1.75% 9 Jul 2022”. This is a 10 year gilt which if you’d purchased it in July 2012 would have cost you £100. If you hold it for 10 years you will get back your £100. Every six months you will receive interest on the bond of half the coupon 0.875% or 87.5p. The price of this bond will rise if interest rates fall and go down if interest rates rise reflecting the general yield in the market.
If you buy a Gilt during its normal dividend cycle you will pay the market price which can be higher or lower than par (normally £100) and on top will be charged for the accrued interest based on the number of days since the last interest payment (coupon date).
If you hold the bond until redemption in July 2022, you will get back £100 per bond regardless of what the market thinks of the price now. However, if you need the money from a bond before the redemption date you may get back more or less than you invested depending on market sentiment towards interest rates.
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