Gilt annual return

chinadolltj

Hi all, I’m looking at two gilts two invest on:
TG24 1% 22-04-2024 and TG50 0.625% 22-10-2050
The current price for TG24 is £97.8 and for TG50 £36.72
I try to understand how much I will get each year with either by using an example of invest in £2000 
TG24 2000/97.8 *1 = 20.4
TG50 2000/36.72*0.625 = 34
I couldn’t quite get my head around that a coupon rate of 1% has less yearly return than a coupon rate of 0.625%
This is also different from my initial rough thinking that if I invest £2000, a coupon rate of 0.625% would mean £12.5 yearly
I must have calculated incorrectly, please kindly advice.

spider42

Your calculations are correct. If you buy £2,000 nominal of TG50, then you would receive £12.50 per year. But if you are spending £2,000, then you would acquire £5,446.62 nominal of TG50, which would yield £34.04 (using your prices, which I've not checked). The coupon payments are relatively unimportant (unless you need the income), and you should really be looking at the yield to maturity, which includes the capital growth too.

Linton

chinadolltj said:

Hi all, I’m looking at two gilts two invest on:
TG24 1% 22-04-2024 and TG50 0.625% 22-10-2050
The current price for TG24 is £97.8 and for TG50 £36.72
I try to understand how much I will get each year with either by using an example of invest in £2000 
TG24 2000/97.8 *1 = 20.4
TG50 2000/36.72*0.625 = 34
I couldn’t quite get my head around that a coupon rate of 1% has less yearly return than a coupon rate of 0.625%
This is also different from my initial rough thinking that if I invest £2000, a coupon rate of 0.625% would mean £12.5 yearly
I must have calculated incorrectly, please kindly advice.

Your crude calculation is sort of right but you need to take into account 3 things..
1) Your capital loss/gain when you sell
2) With TG50 you are tieing up your money for 27 years rather than < 1 year for TG24.
3) TG24 matures in about 6 months time, not 1 year.

Another way of looking at the question is why would anyone buy TG50 if it did not have some benefits over TG24.  The market ensures that there is no inherent advantage buying one gilt rather than another if you are holding for the same amount of time.

Johnjdc

These are very different. Why are you looking at one 6 month option and one 27 year option and nothing in between? What are you actually trying to achieve?

chinadolltj

Johnjdc said:

These are very different. Why are you looking at one 6 month option and one 27 year option and nothing in between? What are you actually trying to achieve?

As I see many people mention about the gilt with low coupon rate in this forum, I try to understand myself on what are their redemption yield. 

Johnjdc

chinadolltj said:

Johnjdc said:

These are very different. Why are you looking at one 6 month option and one 27 year option and nothing in between? What are you actually trying to achieve?

As I see many people mention about the gilt with low coupon rate in this forum, I try to understand myself on what are their redemption yield. 

You can get a list of their yield to maturity pre and post-tax on a number of websites (e.g. https://www.yieldgimp.com/gilt-yields). That's not my question. My question is what financial position you are in that your options are one investment where you'll get your money back with a small increase early in 2024, and one where you have a risk (small but non-zero) of losing 25-30% of your money if you need it back in a hurry in the next few years. It doesn't make sense to me!

chinadolltj

Johnjdc said:

chinadolltj said:

Johnjdc said:

These are very different. Why are you looking at one 6 month option and one 27 year option and nothing in between? What are you actually trying to achieve?

As I see many people mention about the gilt with low coupon rate in this forum, I try to understand myself on what are their redemption yield. 

You can get a list of their yield to maturity pre and post-tax on a number of websites (e.g. https://www.yieldgimp.com/gilt-yields). That's not my question. My question is what financial position you are in that your options are one investment where you'll get your money back with a small increase early in 2024, and one where you have a risk (small but non-zero) of losing 25-30% of your money if you need it back in a hurry in the next few years. It doesn't make sense to me!

I see your point, I asked these two without thinking of the financial position but simply from a perspective of understanding the rate of return. Thank you for reminding me to consider my financial position as well when doing the gilt purchase.