How do Gilts work in practice?

bringingit

Hi, I’m just looking at gilts, and wondering how they work. For example

Treasury 6% 07/12/2028
GBP | GB0002404191 | 0240419
Price 111.740 GBP

I think this means that this is a £100 product, with a current price of £111.740. 

So I pay £111.74, and receive interest each year of 6%. This is based on the original price, so interest of £6 each year. 

On 07/12/2028, I get my final interest payment of £60 as well as the original price of £100 (not the £111.74 I paid…).

In the meantime, the price will change and I’ll have the opportunity to sell (for profit or loss).

Does that sound about right? Have I got any of it wrong? Also just to check, what is the date that I need to buy the gilt in order to receive the internet payment for that year?

any help with understanding would be great. Many thanks.

biscan25

Almost, interest 'coupons' are paid twice a year, so that works out to be £2.96 every 6 months.

The accumulated interest is included in the sale price 'the dirty price', so that it doesn't matter when you buy the gilt as you are paying the previous holder for the portion of the coupon that they would have earned (and likewise your buyer would pay you if you sell the gilt before redemption).

As an aside, that gilt would be a poor choice for a taxpayer if held outside a tax-free wrapper (ISA,SIPP etc.) as tax is paid on the interest, but not on the capital gain at the end.

The price you have quoted there looks like the clean mid price. There's a moderate bid-offer spread, so you will pay a little more than that, plus the accumulated interest as above.

JohnWinder

, I get my final interest payment of £60 as well as the 

Or just £6, actually half that.

bringingit

Ok, thank you for the responses. Still a bit confused.

Accumulated interest - does that just mean the time since the last payment? So roughly if there’s a payment in December and I buy in October, I’ll owe the previous holier 4 months worth of interest? I would then get 2 months worth of interest at the next payment date. 

…and as you said that’s already included in the dirty sale price?

Yes, that was just a mid price. It shows as sell £111.41 and buy £112.41. 

biscan25

bringingit said:

Ok, thank you for the responses. Still a bit confused.

Accumulated interest - does that just mean the time since the last payment? So roughly if there’s a payment in December and I buy in October, I’ll owe the previous holier 4 months worth of interest? I would then get 2 months worth of interest at the next payment date. 

…and as you said that’s already included in the dirty sale price?

Yes, that was just a mid price. It shows as sell £111.41 and buy £112.41. 

You pay the previous owner 4 months interest, then you receive the full 6 months.

aroominyork

1) The 6% is paid on the nominal £100 and is paid twice-yearly, so you receive £3 twice a year.

2) Gilts effectively go ex-div about a week before the coupon payment. If you buy it say two months after the last payment (four months before the next payment) you will pay, as well as £112.41, an additional £1.00 representing one-third of the £3 that you will receive - but have not earned - in four months' time. £112.41 is the clean price; the £113.41 you pay is the dirty price. I expect (someone please confirm this) that if you buy it say five days before the coupon payment, the price will be reduced by about 8p (300/182*5) to £112.33.

3) On the maturity date you will receive £100 + £3 = £103.

Ballard

I've just looked it up and it's showing a coupon rate of 3% rather than the 6% that has been quoted on this thread and a yield to maturity of -1.243 which doesn't look to be a good choice of investment to me.

wmb194

Ballard said:

I've just looked it up and it's showing a coupon rate of 3% rather than the 6% that has been quoted on this thread and a yield to maturity of -1.243 which doesn't look to be a good choice of investment to me.

You looked at the LSE? It looks like 3% is the next coupon - it pays twice a year - and the YTM calculation looks incorrect.

https://www.londonstockexchange.com/stock/TR28/united-kingdom/company-page

Its prospectus. Definitely 6%.

https://www.dmo.gov.uk/media/ukua1mip/prosp1805.pdf

DE_612183

interesting - whats the best way to buy- is it via stockbroker or direct from governemnt?

Linton

See https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/

To buy a bond direct you need to be registered with the Debt Management Office.  As a small private investor I think you would buy from a platform such as HL.

Ballard

wmb194 said:

Ballard said:

I've just looked it up and it's showing a coupon rate of 3% rather than the 6% that has been quoted on this thread and a yield to maturity of -1.243 which doesn't look to be a good choice of investment to me.

You looked at the LSE? It looks like 3% is the next coupon - it pays twice a year - and the YTM calculation looks incorrect.

https://www.londonstockexchange.com/stock/TR28/united-kingdom/company-page

Its prospectus. Definitely 6%.

https://www.dmo.gov.uk/media/ukua1mip/prosp1805.pdf

Ahh I see. I have some interaction with bonds at work and have always seen fixed bonds with an annualised coupon rather than a rate per coupon period. You live and learn.