Have I understood gilts?

j_netprofit

So if bought in an ISA wrapper, based on buying and selling in one full year, using this gilt as an example: https://www.ii.co.uk/bonds/6-treasury-stock-2028/LSE:TR28

18,382 bought at 1.0880 on April 1st 2024 = £19,999.61 (initial investment)

+ 6% = £21,199.59 (difference = £1,199.98)

18,382 sold at 1.0668 on April 1st 2025 = £19,609.92 (-£389.69)

I would have made £810.29...?

 Have I understood or have I made a complete hash here?

  

Flyingkidney

Gilts are not something that I understand much  - but

https://www.investing.co.uk/gilts

As I understand it you're 'buying, or investing' into someones debt  (probably Gary Stephenson has a better description. And they seem to be a lot more volatile than other investments...

SnowMan

The annual coupons are 6% of the nominal (0.06 x 18382), not 6% of the purchase price as you've assumed. So your profit (ignoring costs) is £713.23 not £810.29.

poseidon1

In your 'what if' sceanario you do not mention whether £1.0880 is the clean or 'dirty' purchase price of the gilt.

 If the clean price, then you have not accounted for any accrued income for the period 7 December 2023 to 1st April 2024 in your purchase  computation. This is an additional cost of purchase and paid away to the seller of the gilt. I have not factored in dealing commissions and assumed this deal used II's free trading credit.

On £18,382 nominal stock  that additional cost would be around 115 days interest at £3.021 per day ie around £347.  So total purchase would in fact be £19,999 + 347 = £20,346.

Interest received in the year is £1,102 ( £18,382 at 6 % received in June/December 2024) .

As for the sale on 1st April 2025, assuming you gave the clean price, there would be around 93 days accrued income  this time due to you ie around £347 on top of  £19,609 = £19,956

Pulling these numbers together there is a capital loss on sale  of £390 ( £20,346 - £19,956) , against interest received of £1,102,  a net return of £712 on the £20,346 total intial investment (around 3.50% for the year).

A lot of complexity, to get less than the return of a decent fixed rate cash ISA over the same 1 year period. Trading in gilts rather than holding to maturity can give unpredictable outcomes, in this case less than a  good cash deposit account,

Buying just after  interest payment dates in June or December ( for this gilt ) would remove the accrued income additional cost ( I do this when considering purchasing corporate bonds).

Bear all the above in mind,  if considering a new purchase of the gilt at its current price compared to simply saving in an easy to understand fixed rate cash ISA.

I do both, but tend to buy only new gilt issues issued at par and either held until maturity or potentially sold if price rises noticeably above par. 

saajan_12

Depends on what you're trying to do! 

j_netprofit said:

So if bought in an ISA wrapper, based on buying and selling in one full year, using this gilt as an example: https://www.ii.co.uk/bonds/6-treasury-stock-2028/LSE:TR28

18,382 bought at 1.0880 on April 1st 2024 = £19,999.61 (initial investment)

+ 6% = £21,199.59 (difference = £1,199.98) - no, you invested in £18,382 par value of bonds, and the interest is based on this figure ie 6% x 18,382 = £1102.92 interest

18,382 sold at 1.0668 on April 1st 2025 = £19,609.92 (-£389.69) 

I would have made £810.29...? - No, £1102.92 - 389.69 = £713.22

 Have I understood or have I made a complete hash here?

  

Depends on what you're trying to do. Over the year, you earn £1102.92 in interest (6% x £18382 par value). 

However interest is paid semi annually, so half the interest is in your pocket since July 2024 and half was in since Jan 2025. So thats another ~9 months and 3 months respectively to earn further interest or reinvest in the same bond, netting you £20-30 extra. 

InvesterJones

Flyingkidney said:

Gilts are not something that I understand much  - but

https://www.investing.co.uk/gilts

As I understand it you're 'buying, or investing' into someones debt  (probably Gary Stephenson has a better description. And they seem to be a lot more volatile than other investments...

Or a lot less volatile (none in fact) if you hold to maturity. So depends whether you're actively trying to trade them and sell them to someone else (or using a bond fund) or whether you treat them like a fixed savings account where the return is fixed.

Linton

Flyingkidney said:

Gilts are not something that I understand much  - but

https://www.investing.co.uk/gilts

As I understand it you're 'buying, or investing' into someones debt  (probably Gary Stephenson has a better description. And they seem to be a lot more volatile than other investments...

The "someone" is the UK government ie the £2.7T which gets people worried. There is for all practical purposes zero chance of the gilt not not being repaid at the nominal value since the government can print the £s required ( or more likely re-borrow with a new gilt)..

The volatility arises from varying interest rates. If you owned say a 4% gilt and global interest rates were at say 0.1% the 4% gilts would be desirable and so be traded well above £100.  If global interest rates suddenly rose to 5% the 4% gilt would not be desirable and so its value would be less than £100.  This is what happened a couple of years ago but such circumstances of that magnitude are rare.

If you buy a gilt that is close to maturity the difference in interest rates would not matter much as its value at maturity is guaranteed to be £100. So buy short dated gilts if volatility worries you.

j_netprofit

Again, newbie here so please don't lash me...but when buying gilts how important is the price? Surely the coupon percentage is the main factor?

Johnjdc

j_netprofit said:

Again, newbie here so please don't lash me...but when buying gilts how important is the price? Surely the coupon percentage is the main factor?

No, the total return is the main factor and the coupon percentage is based on the original price of 100.

If the coupon percentage was all that mattered, buy TR28 with a coupon percentage of 6%, but since it will cost you £106 per £100 of gilt, it'll return you less overall than buying TG29 with a coupon percentage of 0.5% but a price or £87 per £100 of gilt.

j_netprofit

Have I input everything correct there? 

If so investing 60k into this bond today would in total, payout how much??

j_netprofit

It's about 70k.....right?