Q.Easing - Buying Government Gilts- Who Gets The Coupon Payments?

mr_fishbulb

Something I was wondering about last night.

The BoE are using new money in the form of Quantitative Easing to buy Government Bonds from Banks.

Do the BoE now get paid the coupons on the gilts from the government? In other words, is tax-payers money being given to the BoE in return for something they purchased with "new" money?

Radiantsoul

mr_fishbulb wrote: »

Something I was wondering about last night.

The BoE are using new money in the form of Quantitative Easing to buy Government Bonds from Banks.

Do the BoE now get paid the coupons on the gilts from the government? In other words, is tax-payers money being given to the BoE in return for something they purchased with "new" money?

Yes, I suspect it does. But the BOE is owned by the government so it makes no difference that I can see.
Anyway the value of the gilt will fall as payments are received. In other words the net present value of the bond=capital value+cash payments(ignoring discounting and other complications).

Generali

mr_fishbulb wrote: »

Something I was wondering about last night.

The BoE are using new money in the form of Quantitative Easing to buy Government Bonds from Banks.

Do the BoE now get paid the coupons on the gilts from the government? In other words, is tax-payers money being given to the BoE in return for something they purchased with "new" money?

Nope. AIUI, the Gilts are destroyed.

Anyway, the BoE is wholly owned by the British Government and so any income paid in interest would just be a book transfer between accounts in the BoE's books.

Radiantsoul

Generali wrote: »

Nope. AIUI, the Gilts are destroyed.

Anyway, the BoE is wholly owned by the British Government and so any income paid in interest would just be a book transfer between accounts in the BoE's books.

I believe what happens is on the BOE books;
Credit cash(nomial balance) and Debit Assets(gilts) when assets are purchased. The net impact is neither a net debit or liability but a bigger balance sheet. When resold the debit is reduced and the credit extinguished. Again the net balance sheet position should be the same.

I presume a coupon is a partial repayment.

Destroying the gilt would not be possible without a corresponding P and L entry(crediting the balance sheet and debiting P&L by the value of the bond destroyed). This would be expensive.

Generali

Radiantsoul wrote: »

I believe what happens is on the BOE books;
Credit cash(nomial balance) and Debit Assets(gilts) when assets are purchased. The net impact is neither a net debit or liability but a bigger balance sheet. When resold the debit is reduced and the credit extinguished. Again the net balance sheet position should be the same.

I presume a coupon is a partial repayment.

Destroying the gilt would not be possible without a corresponding P and L entry(crediting the balance sheet and debiting P&L by the value of the bond destroyed). This would be expensive.

Very interesting, thanks.

I sent the following email to enquiries@bankofengland.co.uk:

Dear Sir or Madam,

I am writing as a member of an internet forum with an interest in economics.

A couple of our members were wondering what happens to the Gilts that
the Bank of England buys as a result of the policy of Quantitative
Easing. We would be interested to know. Are the Gilts 'destroyed' or
do they continue to pay a coupon to the Bank of England for example.

I look forward to your response.

Radiantsoul

Generali wrote: »

I sent the following email to [EMAIL="enquiries@bankofengland.co.uk:"]enquiries@bankofengland.co.uk:[/EMAIL]

Will be interesting to see what they come back with.

beingjdc

An ex-employee I spoke to with plenty of contacts still there suggests that they will hold on to them and sell them back into the market at some future date. The coupon will be used to make up for the fact that they will otherwise be selling them at a loss (since gilts are currently overvalued as everyone wants them as a safe haven, but will be worth a lot less when the economy recovers).