Index Link Gilt

AndyT678

phb71 wrote: »

So what keep everyone to look for gilt with an initial price as small as possible (under the nominal value) and a coupon or running yield as high as possible and just ignore all the others (price above nominal value, low coupon/yield).?

You do understand that there are thousands of people around the world who are employed to trade these things right? They have better understanding of the market than you do, they have better information, better systems, more experience, more money, lower transaction fees and you are absolutely NOT going to swoop in and grab a "bargain" from under their noses.

Linton

phb71 wrote: »

OK - and if I hold a gilt for a few years - can the coupon changed based on the rise/fall of overall interest rate over the years and actually change my return from year 3 vs years 4 for example despite that I already hold the gilt?

In the same mindset, if I bought gilts £120 with a nominal value of £100 - if I sell it:
- before the maturity date, can the price be higher or lower than £120 based on the market just like shares?
- on the maturity date, I will get back £100 in any case?

So what keep everyone to look for gilt with an initial price as small as possible (under the nominal value) and a coupon or running yield as high as possible and just ignore all the others (price above nominal value, low coupon/yield).?

A gilt's par value (usually £100) remains constant from the day it was created until it matures. So if you bought a £100 5% gilt for £110 you would get £5 interest every year until the bond matured at which point you would get £100 back. So your effective interest rate (yield to maturity) is less than 5% because of the extra £10 you paid.

Before maturity the price for buying and selling goes up and down depending on market conditions.

Because the return from gilts is guaranteed and known to all buyers and sellers you dont get good or bad deals. Prices adjust themselves so that they are mathematically all equally valuable. You wont get an unusually high return gilt for less than par.

The important difference is the maturity date. If you need money in 5 years time you can buy a gilt that matures in 2020 now and know exactly what return you are going to get.

Just like with fixed term bank accounts the interest rates depend on the time to maturity. Generally the longer the time to maturity the higher the effective interest rate (yield to maturity). But of course at a higher risk if you want to sell earlier.

phb71

Thank you Linton/Reaper for the helpful answers.

But the price above nominal value becomes more important as the redemption date looms. The price of the gilt will start to move towards it as the date approaches.

Why?

Linton

phb71 wrote: »

Thank you Linton/Reaper for the helpful answers.

Re: the price of a gilt will move towards the par value as it approaches maturity

Why?

Because you will certainly get the par value returned at maturity, nothing more nor nothing less. Why would anyone pay £105 for a gilt for which they would only get £100 in a short time? Conversely why would anyone sell at £95?

Today's value of a gilt is equal to the value at maturity plus the value of all future interest payments discounted by the market interest rate.

Reaper

Reaper wrote: »

But the price above nominal value becomes more important as the redemption date looms. The price of the gilt will start to move towards it as the date approaches.

phb71 wrote: »

Why?

I might not have been clear, by "it" I meant the nominal value, not the price above nominal value.

So a £100 gilt you paid £120 for a few years ago will end up being traded in the market close to £100 when it is about to be redeemed, regardless of what else is going on with inflation, base rates etc.