Have I understood gilts?

wmb194

j_netprofit said:

Have I input everything correct there? 

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

Looks way off - 188.576% pa! The "bond price" should be 87.9, not 0.879.

j_netprofit

What do you calculate the return to be on 60k then?

Linton

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?

The price is as important as the coupon %.  If you buy at a price  above par (£100) you will make a capital loss at maturity, if below par you will make a capital gain.  A capital loss could wipe out a large amount of your expected interest.   A capital gain could make a low coupon % worth considering.  It also has tax implications as interest is taxed whereas gilt capital gains are not.

j_netprofit

j_netprofit said:

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

Would someone be kind enough to check this please?

OldScientist

 yieldgimp.com is a good place to start with gilt yields. The accrued interest is also listed. However, if you want to calculate your own yields and are fairly happy using a spreadsheet, then the yield function is useful.

Your original suggestion (TR28), currently (10 April) has a yield to maturity of 3.85% which means that (very roughly) the annualised return will be around 3.85% (the relationship between yield and total return is only approximate, but good enough unless coupons are large - perhaps 10% or more).

The advantages of gilts are
1) capital gains are tax free although coupons attract income tax in the same way interest does. For those held outside a tax shelter (e.g., ISA or SIPP), a low coupon gilt will usually reduce tax.
2) The gilt can be sold at any time (unlike funds in 3 year fixed rate savings account, currently available at 4.5%) although the price at sale is unknown (and could be more or less than the purchase price)
3) For large amounts, exceeding the FSCS limit of £85k is not a problem with gilts.

j_netprofit

I appreciate I'm perhaps being a bit needy here but I'm not necessarily looking for advise, just if my understanding and workings out are correct.

In this scenario I'm considering investing into a gilt that matures close to 2054.
The investment sum is £60k.

Therefore investing said amount today into the TR54 would return approx £195k

Or have I completely misunderstood?

If my workings out are correct...and it doesn't take you an age to check...is there another gilt that would offer a better return with the ball park maturity date of say 2046-2055?

Thanks in advance

saajan_12

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?

Theyre equally important - If you want to think in interest terms, then the difference between the price and 100 is effectively split between the years remaining and added (or subtracted) from the coupon percentage. 

If you buy a bond at price £88 (rounded from 87.9) with 4 years remaining and 0.5% coupon, then:
- At the start you only paid £88 but at the end you'll get £100 ie extra £12 split over 4 years is £3 a year. 
- Coupon gives you 0.5% x 100 = £0.50 a year interest
- Total £3.50 per year, on an £88 investment, so your return is ~3.5 / 88 = 3.98% return per year
- If you invest £60k now, then in 4 years you get around 60k x 3.98% x 4 years = 9.6k extra. ie get back around £69.6k if you hold to maturity. 
 

This is intentionally very approximate to give you an idea of whats happening. There's discounting of each cashflow and accrued interest that I'm not accounting for. This also only applies if you hold to maturity.. if not then the £12 could change.. 

j_netprofit

saajan_12 said:

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?

Theyre equally important - If you want to think in interest terms, then the difference between the price and 100 is effectively split between the years remaining and added (or subtracted) from the coupon percentage. 

If you buy a bond at price £88 (rounded from 87.9) with 4 years remaining and 0.5% coupon, then:
- At the start you only paid £88 but at the end you'll get £100 ie extra £12 split over 4 years is £3 a year. 
- Coupon gives you 0.5% x 100 = £0.50 a year interest
- Total £3.50 per year, on an £88 investment, so your return is ~3.5 / 88 = 3.98% return per year
- If you invest £60k now, then in 4 years you get around 60k x 3.98% x 4 years = 9.6k extra. ie get back around £69.6k if you hold to maturity. 
 

This is intentionally very approximate to give you an idea of whats happening. There's discounting of each cashflow and accrued interest that I'm not accounting for. This also only applies if you hold to maturity.. if not then the £12 could change.. 

Thank you and yes  understand now how equally important both are. 

Would you mind looking at my previous post so see if I’ve understood how to calculate, again like your post here it’s only approx 

Thank you

j_netprofit

Just to clarify…the bond would be invested into a SIPP.

saajan_12

j_netprofit said:

I appreciate I'm perhaps being a bit needy here but I'm not necessarily looking for advise, just if my understanding and workings out are correct.

In this scenario I'm considering investing into a gilt that matures close to 2054.
The investment sum is £60k.

Therefore investing said amount today into the TR54 would return approx £195k

Well yes in 2054 you'll have around £195k, but that's a very long timeframe and over 30 years, the discounting and time value of money starts to matter much more. 
Sounds like you're thinking of this as a retirement plan, but remember the buying power of £195k will be much less than it is now. 

j_netprofit said:

If my workings out are correct...and it doesn't take you an age to check...is there another gilt that would offer a better return with the ball park maturity date of say 2046-2055?

Thanks in advance

All UK Gilts around the same maturity will have around the same return / yield (that's what you're effectively comparing). Reason is if one was much better than the others then more people would buy it, creating more demand and hence the starting price would go up, meaning the return reduces back to being in line with the others and vice versa. The credit risk (ie chance that the UK defaults) is the same.