Gilts Example

valiant24

Please may someone help me with an example on Gilts?
I want to invest in a Gilt (some Gilts?) within my SIPP.   I'm looking at a 15 year time horizon.  Because my SIPP is already quite close to the lifetime allowance I'm happy to have a low-interest but safe investment like gilts.
Consider this Gilt for example: https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-070937-gilt
As I understand it, if I bought (say) £1m worth today, I would get (1,000,000 / 1.1599 buy price) = 862,143 such gilts.
Each year I held the Gilt I would be paid, 6-monthly, 862,143 x 1.75% = £15,088 cash.  16.5 years of that would give me 16.5 x £15,088 =  £248,952. 
And on 07/09/37, if I still held the Gilt, I would be repaid £862,143.
(I'm ignoring platform fees which with AJ Bell would I think be capped at £10 per month).
Are my sums correct, or have I completely misunderstood it all?
Thanks
V

Thrugelmir

Other for the fact that Gilts are traded in nominal multiples of £100.  Your thinking is correct. 

Ash_Pole

I've had a bit to drink, but I think you're right. I get a gross redemption yield of 0.64%. 
That bid/offer spread on HL looks on the high side to me. 

Thrugelmir

Ash_Pole said:

That bid/offer spread on HL looks on the high side to me. 

Be the closing spread. Market will tighten when it reopens. 

JohnWinder

Thrugelmir said:

Other for the fact that Gilts are traded in nominal multiples of £100.  Your thinking is correct. 

Specifically:

'The prices of conventional gilts are quoted in terms of £100 nominal. However, they can be traded in units as small as a penny.'

https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/

Your calculation pretty much accords with the yield figure here: https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3

msallen

I haven't checked the calculations as I'm sure you're as capable as I am of using a calculator, however I think you have misunderstood the nominal value. If you buy £1m nominal value gilts then when they mature you'll get back £1m regardless of what market price you paid for them.

MK62

......the OP wouldn't be buying 1m gilts, each with a PAR value of £1 though.....he/she would only be buying 862143 of them, as the buy price is higher than the PAR value. 

PS.....inflation is the big risk here though.....if that runs significantly higher than 0.64% over those 16 years, the OP could be on the back end of some real term losses (the extent of which obviously depend on the actual rate of inflation we see)

msallen

Fair point - I wrongly read "£1m worth" as meaning "£1 face value". It's too early in the morning 

HansOndabush

It depends what you mean by a 'safe' investment. In nominal terms, in 16 years, you get back £862,143 but what would that buy you if in the meantime inflation shoots to 10% or more? I'd rather hold gold for 16 years as I think my gold would buy more than your gilts at the end of that time.

Apodemus

MK62 said:

.....inflation is the big risk here though.....if that runs significantly higher than 0.64% over those 16 years, the OP could be on the back end of some real term losses (the extent of which obviously depend on the actual rate of inflation we see)

Indeed! The only holding that I am currently doubting in my SIPP is my T45 Gilts (3.75% 2045). Apart from being 6% down at present on capital value, if I was doing this again I would have gone for one of the Index-linked gilts. At some point I might turn them over, but hopefully at a price nearer to purchase value.

MK62

It's all relative though........did you think the same about your Gilts in March last year, after your equites had just taken a walk off the edge

If the original reason for you holding Gilts still holds true, then you have to ask yourself what you'd do with the proceeds if you sold them.