Undated Gilts as alternative to low interest Savings Accounts

datostar

I see that today's price of 2 1/2% Consolidated Stock is 58.79p. Yield is 4.25% gross. As is the way of gilts, presumably any fall in the 'coupon' would be compensated for by a rise in the capital value.

Whilst investing in 'Consols' might sound very old-fashioned, positively Victorian/Edwardian in fact, few easily accessible savings accounts or Cash ISAs are paying 4.25% and when they do it's usually only for 12 months. These things go on for ever, quietly paying out every 6 months.

Might they be a viable alternative to savings accounts at present or do the experts here see any problems?

Reaper

Not sure I quite understand your bit about the coupon and the rise in price, but generally gilts are fine if you want a fixed rate.

However the risk is inflation plus when you eventually decide to sell them you will get more or less than you paid for them.

If interest rates are running at 10% when you come to sell them then the price you will get will be less than you paid.

Also if inflation takes off then the yield that looks good now might look feeble in the future.

It works boths ways of course and you might end up better off when you come to sell, but it is hard to see how much more interest rates can drop.

Everything has risk, even safe looking gilts.

Masomnia

The main problem is that you're accepting that rate for however long you hold the gilts for.

So the risk is that ISA rates accross the board rise, and you're stuck with your gilts paying 4.25%. If this does happen, at the same time the value of your gilts will fall, as interest rates rise, so you'll be holding an asset paying a lower rate which you can't sell as you'll make a capital loss.

To be clear, whatever yield you're getting when you buy the gilts you continue to get for as long as you hold them. You still get £2.50pa per consol; even if the yield changes as quoted on the markets.

It's certainly a viable alternative, especially as you can buy within a stocks and shares ISA, and if the capital value does fall, you can buy more to take advantage of the higher yield, which you will recieve in perpetuity.

As with everything else the greater reward does come with more risks.