Explain Gilts/Bonds to me like I am 5 years old please?

Linton

In my view:

Gilts and corporate bonds are very different:

1) corporate bond prices tend to move in line with equity because of the risk of failure as well as reacting to interest rate changes so they are less useful than gilts as a relatively safe diversifier. Corporate bonds are more appropriate for income investors seeking high yields with less concern about capital values.
2) individual gilts are increasingly available to the private investor trading in small quantities. This is not true for most corporate bonds which are mainly traded in large deals between institutions. 

3) as government bonds are bought for security there seems little point in looking beyond UK gilts. On the other hand income investors can benefit from corporate bond global diversification.

For these reasons corporate bonds are best bought through funds whereas the benefits of gilts are best gained by buying individual gilts.

GenX0212

QrizB said:

GenX0212 said:

At the basic level though, and correct me if I am wrong, a bond is pretty much a 'promise to pay' right?

Yes.

GenX0212 said:

 and barring a major financial event is about as good a guarantee that you can get.

No.

The promise is only as good as the organisation that has made it.

Businesses go into administration all the time, and when they do their bondholders are amongst the losers. Or businesses might restructure their debts to avoid administration, again at the cost of their bondholders.

GenX0212 said:

As I said I'm interested in the 'safe' returns aspect. I know for instance that there is very little likelihood of UKPN or UU going to the wall in the next 5 years.

Lots of things might happen in the next five years to result in UU or UKPN being unable to pay their debts. That's one of the reasons their bonds give higher yields than UK Government debt (gilts) do.

Assigning relative risk ratings to bonds is a business in itself. See for example:

https://ratings.moodys.io/ratings

Interesting, thank you. I'm starting to see some of the complexity of the bonds.

I see for instance that Thames Water's parent company Kemble Water defaulted on a bond issue in 2024 and subsequently Thames itself recently had a new £3billion loan approved following a challenge through the courts. I believe the Kemble Water debt default still remains unresolved though.

Equally I can see that Thames Water is and has been a very different animal to the debt strategy of UU and LPN/UKPN and that the latter are considered very much more stable so I guess it would be very much a case of needing a lot more research to understand each individual bond issue, structure and financial health of the companies before making any decisions.

Although I think UU and UKPN are both good, viable businesses the risk/reward of an additional 1.5% vs Gilts probably doesn't meet my objective of a guaranteed safe return. Maybe one for the future when I'm actually retired and have the time to educate myself and do the necessary research.

Many thanks for everyone's input.

Mr_Benn

Very informative thread, as Im also a complete newbie to Bonds, but keep reading about as Im 3.5 years from retiring, how I should be moving from 100% Equity Funds, to a greater percentage of Bonds.  For me , I will probably the go the easier route of choosing Fund, either 60% equity /40% Bonds or even a 100% Bond Fund if they exist ? 

Mr_Benn

If anybody would like to offer their thoughts on going for a 60/40 Fund, or even better recommend one, Id be most grateful.

Hoenir

Mr_Benn said:

If anybody would like to offer their thoughts on going for a 60/40 Fund, or even better recommend one, Id be most grateful.

A guide

https://monevator.com/passive-fund-of-funds-the-rivals/

kempiejon

Mr_Benn said:

Very informative thread, as Im also a complete newbie to Bonds, but keep reading about as Im 3.5 years from retiring, how I should be moving from 100% Equity Funds, to a greater percentage of Bonds.  For me , I will probably the go the easier route of choosing Fund, either 60% equity /40% Bonds or even a 100% Bond Fund if they exist ? 

Personally I buy individual bonds/gilts and other fixed interest though I have a small holding in each of Vanguard UK and Global etfs. I have staggered maturity over the next few years and some perpetual high yielders. I'm around 20% cash/bonds now and that's the most it's ever been. Some of my equity investments have fallen a bit recently, I live off my investments. 

GenX0212

I took the plunge and started converting my two smaller dc pots into index linked gilts as of today. This will guarantee ~£14k on top of my DB pension of £13.5k until SP kicks in. My main pot of £610k+ is staying invested in stocks and shares.

a word of warning, DO NOT try to use Grok to explain Gilts to you. I asked it to calculate the current redemption price assuming 0% future Rpi in order to gauge against what I actually paid today. This is the nonsense reply I got:

### Current Inflation-Adjusted Value of T27 Gilt Holding

You hold **5,320 units** of the UK Government 1.25% Index-Linked Treasury Stock due 22 November 2027 (T27, ISIN: GB00B128DH60), equivalent to **£5,320 nominal** (with each unit representing £1 nominal, or 53.2 "actual gilts" at £100 nominal each). You’ve requested the **current inflation-adjusted value** as of October 20, 2025, 5:18 PM BST. This refers to the **inflation-adjusted dirty price** multiplied by the nominal holding, reflecting the economic value in real terms (i.e., accounting for RPI uplift). This aligns with prior discussions, including your reference to Copilot’s adjusted dirty price range (£213.70–£214.38 per £100 nominal) and the 0% future RPI assumption for redemption.

#### Step-by-Step Calculation

1. **Unadjusted Dirty Price**:

   - **Clean Price**: As of October 20, 2025, the clean price is **101.58p** (£1.0158 per £100 nominal) per Hargreaves Lansdown data.

   - **Accrued Interest**:

     - Semi-annual coupon: 0.625% (1.25% ÷ 2) of inflation-adjusted principal.

     - Index ratio (for October 2025, using RPI July 2025 with 3-month lag): RPI July 2025 ≈ 406.4 (extrapolated from RPI August 2025 ≈ 407.7 and 4.6% YoY inflation trend) ÷ base RPI November 2009 = 220.6 ≈ **1.8414**.

     - Coupon per £1 unit: 0.00625 × 1.8414 ≈ £0.01150875.

     - Days accrued: 151 (May 22, 2025, to October 20, 2025) out of 184-day period (to November 22, 2025).

     - Accrued interest per £1 unit: £0.01150875 × (151/184) ≈ £0.009448.

     - Per £100 nominal: £0.009448 × 100 = **94.48p**.

   - **Unadjusted Dirty Price**: 101.58p + 94.48p = **196.06p** (£1.9606 per £1 unit, or £196.06 per £100 nominal).

2. **Inflation-Adjusted Dirty Price**:

   - Multiply the unadjusted dirty price by the index ratio:

     \[

     196.06 \times 1.8414 \approx 361.07p \text{ (£3.6107 per £1 unit, or £361.07 per £100 nominal)}

     \]

   - **Copilot’s Range (£213.70–£214.38 per £100 nominal)**:

     - This range, sourced from platforms like Dividend Data, appears to use a lower adjusted price, possibly reflecting:

       - A slightly lower clean price (e.g., 97–98p earlier in October).

       - A different RPI estimate or averaging method (e.g., June 2025 RPI).

       - An approximation of the "real economic cost" closer to the redemption principal (~£184.84 per £100 nominal) plus a market premium.

     - My calculation (361.07p) is higher due to the precise index ratio and current clean price (101.58p). However, since you referenced Copilot’s range, I’ll compute using both for clarity.

3. **Total Inflation-Adjusted Value for 5,320 Units**:

   - **Using My Calculated Adjusted Dirty Price (361.07p per £100 nominal)**:

     - Per £1 unit: £3.6107.

     - Total: 5,320 × £3.6107 ≈ **£19,208.92**.

   - **Using Copilot’s Range (£213.70–£214.38 per £100 nominal)**:

     - Per £1 unit: £2.1370–£2.1438.

     - Total: 5,320 × £2.1370 ≈ **£11,368.84**.

     - Total: 5,320 × £2.1438 ≈ **£11,405.02**.

4. **Reconciling the Discrepancy**:

   - The **361.07p** figure uses the exact index ratio (1.8414) and current clean price (101.58p), reflecting the full inflation-adjusted economic value of the dirty price (including accrued interest).

   - The **213.70–214.38p** range aligns with analytical platforms (e.g., Dividend Data) that may use a simplified or averaged approach, possibly pegging the adjusted price closer to the inflation-adjusted principal (~£184.84) plus a premium for market yield. This is a common retail-facing approximation for "real value."

   - Given your contract note’s purchase price (£2.11 per £1 unit = £211 per £100 nominal) and Copilot’s range, the **213.70–214.38p** range is likely more relevant for consistency with your expectations and industry reporting.

#### Implications for Your Holding

- **Nominal Value**: £5,320 (5,320 units × £1).

- **Unadjusted Market Value (Sellable Today)**: 5,320 × £1.9606 ≈ **£10,446.39** (at 196.06p per £100 nominal).

- **Inflation-Adjusted Value**:

  - Copilot/Dividend Data range: **£11,368.84–£11,405.02** (most aligned with your query context).

  - Precise calculation: **£19,208.92** (full economic value but less commonly quoted).

- **Redemption Value (0% Future RPI)**: 5,320 × £1.8484 ≈ **£9,833.49** (at maturity, November 22, 2027).

- **Purchase Cost**: £11,337 (including ~£111.80 charges). The current adjusted value (£11,368–£11,405) is close to your purchase cost, suggesting minimal real loss in inflation-adjusted terms, though the unadjusted market value (£10,446) reflects a nominal loss.

#### Notes

- **Why Use Copilot’s Range?**: It matches retail platforms’ simplified reporting (e.g., Dividend Data) and your prior reference, making it practical for valuation purposes.

- **Why Higher (361.07p)?**: My calculation uses the latest RPI and clean price, capturing the full inflation uplift on both price and accrued interest. It’s less common in retail quotes but more precise for economic analysis.

- **Market Context**: The adjusted value reflects the gilt’s real purchasing power, ideal for assessing portfolio worth against inflation. If selling, you’d receive the unadjusted dirty value (~£10,446).

- **Data Sources**: Clean price from Hargreaves Lansdown; RPI from ONS (July 2025 estimated via August data); Copilot’s range validated via Dividend Data methodology.

### Final Answer

The **current inflation-adjusted value** of your 5,320 units (£5,320 nominal) of the T27 gilt, based on Copilot’s referenced range, is **£11,368.84 to £11,405.02** (using £213.70–£214.38 per £100 nominal). For maximum precision, the value is **£19,208.92** (361.07p per £100 nominal), but the lower range aligns with standard retail reporting. If you need further analysis (e.g., yield or trade date), please share additional details!


This was co-pilot:

I have bought 5320 units. what is my holding worth today. what will I get back in coupons and final redemption if I hold until redemption. assume 0% future Rpi for simplicity

11 minutes ago

Step 1: Calculate the current holding value

 

The current value of your holding is based on the dirty price, which includes accrued interest and inflation. The dirty price is quoted per £100 nominal value. With a dirty price of £214.174 per £100 and a holding of 5,320 units (representing a nominal value of £5,320), the current value is calculated as follows: 

Current Value=Nominal Value£100×Dirty Price

Current Value=£5320£100×£214.174=53.2×£214.174=£11,395.27

---

Step 2: Calculate future coupon payments 

The gilt has a coupon of 1.25% per annum, paid semi-annually. The assumption of 0% future RPI means the nominal value used for calculating coupons will not be adjusted for inflation from today's date. The current nominal value, adjusted for inflation, is £11,395.27. As of October 20, 2025, there are 5 remaining semi-annual coupon payments until the maturity date of November 22, 2027. 

The calculation for each semi-annual coupon is: 

Semi-annual Coupon=Nominal Value×Coupon Rate2

Using the inflation-adjusted nominal value from today's dirty price: 

Semi-annual Coupon=£11,395.27×0.01252=£71.22

The total value of all future coupons will be: 

Total Coupon Value=5×£71.22=£356.10

---

Step 3: Calculate final redemption value 

At maturity, the redemption value is the inflation-adjusted nominal value. Assuming 0% future RPI, the redemption value will be the current inflation-adjusted nominal value. 

Redemption Value=£11,395.27

---

Answer: 

Based on the current dirty price and assuming 0% future RPI, your holding is currently worth £11,395.27. 

If you hold the gilt until its redemption on November 22, 2027, you can expect to receive approximately £356.10 in total coupon payments and £11,395.27 as the final redemption value. 

af1963

Grok - out by a factor of 100 on the clean price, thinks you can buy £100 nominal for £1.0158 .  Yes please, I'll have some at that price  ... 

Good illustration of how AI can generate pages of plausible looking analysis, complete with notes and explanations, which is completely wrong., and yet sound 100% confident in its answer.

MeteredOut

af1963 said:

Grok - out by a factor of 100 on the clean price, thinks you can buy £100 nominal for £1.0158 .  Yes please, I'll have some at that price  ... 

Good illustration of how AI can generate pages of plausible looking analysis, complete with notes and explanations, which is completely wrong., and yet sound 100% confident in its answer.

Grok (and other generative AIs) are text prediction engines - they not not "think".

But they can be a great addition to a financial toolbox, so long as you're careful and specific with your prompts, and always question the responses.

phlebas192

MeteredOut said:

af1963 said:

Grok - out by a factor of 100 on the clean price, thinks you can buy £100 nominal for £1.0158 .  Yes please, I'll have some at that price  ... 

Good illustration of how AI can generate pages of plausible looking analysis, complete with notes and explanations, which is completely wrong., and yet sound 100% confident in its answer.

Grok (and other generative AIs) are text prediction engines - they not not "think".

But they can be a great addition to a financial toolbox, so long as you're careful and specific with your prompts, and always question the responses.

Which is one of the main problems with them - you have to know enough about the subject to sense check their answers. So they are a useful tool for those who already have a reasonable understanding of the subject but worse than useless when it comes to anything important for everyone else.