The bond/gilt market

zagfles

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

Mikeeee_2

zagfles said:

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

I completely agree that inflation risk is very real. But sadly, you are completely missing the point of the thread. 

zagfles

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

I completely agree that inflation risk is very real. But sadly, you are completely missing the point of the thread. 

Regardless what the point of the thread is, I think part of it is misleading and make no apologies for pointing that out.

Mikeeee_2

zagfles said:

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

I completely agree that inflation risk is very real. But sadly, you are completely missing the point of the thread. 

Regardless what the point of the thread is, I think part of it is misleading and make no apologies for pointing that out.

You will have to take up your argument with the Bank of England who effectively call it this due to the fact that there is practically chance of you making any capital loss. Regardless, I wish you good luck in your life journey of semantics.

Anyway, I have edited it, just for you 

Reed_Richards

Mikeeee_2 said:

If you hold a bond within a tax wrapper (like a pension or ISA) then there is no tax to pay on income received from the coupon nor Capital Gains Tax (CGT) should you sell the bond/gilt for a profit.

In fact there is no CGT on (some?) gilts held outside as ISA or pension; is that not correct?

Mikeeee_2

Reed_Richards said:

Mikeeee_2 said:

If you hold a bond within a tax wrapper (like a pension or ISA) then there is no tax to pay on income received from the coupon nor Capital Gains Tax (CGT) should you sell the bond/gilt for a profit.

In fact there is no CGT on (some?) gilts held outside as ISA or pension; is that not correct?

There is no CGT to pay on all gilts. Most (but not all) corporate bonds are also CGT exempt.

Income (coupon payments) is taxable.

zagfles

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

I completely agree that inflation risk is very real. But sadly, you are completely missing the point of the thread. 

Regardless what the point of the thread is, I think part of it is misleading and make no apologies for pointing that out.

You will have to take up your argument with the Bank of England who effectively call it this due to the fact that there is practically chance of you making any capital loss. Regardless, I wish you good luck in your life journey of semantics.

Anyway, I have edited it, just for you 

Well if you think it's just semantics, I wish you good luck in your "risk free" journey. Bye.

Johnjdc

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Mikeeee_2

zagfles said:

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

Mikeeee_2 said:

zagfles said:

The section headed "risk free return" is misleading because it completely ignores inflation risk. You buy a flat gilt maturing in 2049, yes you'll get a guaranteed return in nominal terms, and if you hold till 2049 you'll get £100 then, but you have no idea whatsoever how much £100 will buy you in 2049. Maybe a round in the pub. Maybe a pint. Who knows. But £100 in 2049 is not going to be the same as £100 today - that is virtually certain. So you don't know the real maturity value. You are taking a risk, in the same way as taking a risk on the stockmarket (you can argue the level of risk is different - but it's still a risk).

The risk free return is what you'll get in absolute terms. It is completely known. Inflation risk is something else. By investing in the stock market, you should beat inflation but as a minimum you should be looking to beat the bond market return. Otherwise, what's the point? It's intentionally there to make people realise they can get that return guaranteed. If you want that plus inflation protection then you go down the route of RPI index linked gilts. So I disagree that it's misleading. It's a benchmark figure.

Inflation risk isn't "something else". It's fundamental. You know how many £ you'll get but not how much those £ will be worth. Over a 25 year period that risk is massive, you have no idea what your real maturity will be. £100 in 1999 is about £227 now. If that repeats £100 will be worth £44 of today's value in 2049. It would far worse in some other historical periods or in some other countries. 

Long term flat gilts are risky for this reason. You can argue about the relative risk compared the stockmarket, but the only real (almost) "risk free" option is to use index linked gilts. So it's very misleading to call flat gilts "risk free". They are not. 

I completely agree that inflation risk is very real. But sadly, you are completely missing the point of the thread. 

Regardless what the point of the thread is, I think part of it is misleading and make no apologies for pointing that out.

You will have to take up your argument with the Bank of England who effectively call it this due to the fact that there is practically chance of you making any capital loss. Regardless, I wish you good luck in your life journey of semantics.

Anyway, I have edited it, just for you 

Well if you think it's just semantics, I wish you good luck in your "risk free" journey. Bye.

Of all the things you could comment on, this is the one bit you focus everything on. Which I tidied up, just for you by the way. If that doesn't satisfy you and you still focus on the minutia of something you can't seemingly can't grasp about the use of English language (used by the Bank of England, no less) then you are beyond help 

Bye 

zagfles

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds