Calculating Gilt return on capital and coupon

older_and_no_wiser

Recently retired and wanting to invest some new capital into gilts. This is to minimise future tax on savings/stocks.

After doing some research, I like the idea of purchasing individual gilts. To minimise possible savings tax, I'm considering buying discounted gilts with lower coupons (eg TG26).

I'd appreciate a sanity check of my calculations to make sure I've got the maths right!

For TG26, the gilt was issued in Feb 2016. The buy price now is £0.97. If I bought £20,000 pounds worth, I get around 20,657 of them.

The current coupon is 1.5% and this is next paid on 20/7 this year. Am I right in thinking I will get 1.5% on my full purchase as long as I buy them before 20/7? ie this would be around £310.

The gilt will mature on 22/7/26 and I intend on holding them until then. So am I right thinking on that date I will receive £20,657 (as I purchased 20,657 of them)?

My total return for an initial "investment" of £20,000 would be:

£20,657 (amount of gilts bought)
+
£310 (coupon return)
= £20,967

which is a 4.8% return on initial outlay.

EthicsGradient

It's often simple to let a calculator work out gilt returns, because things like clean/dirty prices for buying part way through a period make it complicated. Gilt Yields (yieldgimp.com) is the best I've seen. It has the annual equivalent rate of return as 4.03% (and the LSE says 4.033%). Your first coupon would be on 22/7/25, and would give 75p per 100 gilts (0.75%), but we're nearly half way through the period for that coupon, so the price you pay will be perhaps 35p higher than you see, to make up for that. Then you'll get another 75p on 22/1/26, and the final 75p on 22/7/26, with the £100 of nominal value.

Over the 15 and a bit months, that works out at about 5% return.

kimwp

Very not an expert on this, but I think there is a "clean" quoted price and a "dirty" price, which is what you actually pay. The dirty price includes the proportion of the coupon in relation to how far through the period between coupon payments it is. So if you are halfway between coupon payments, then half the coupon will be added to the price you pay.

older_and_no_wiser

Oh, never heard of these clean and dirty prices! Thanks!

MK62

TG26 latest clean price is 96.82........latest dirty price (price inc accrued interest since last coupon payment) is £97.11.

If you invest £20000, you'd get 20000/97.11...........but there is also a bid/offer spread, so you'd likely pay c.97.16 today. You'd end up with 205.84 (gilts are priced per nominal £100, but they can be traded in £1 splits).
So you would get 75p*205.84=£154.38 in July25, Jan26 and July26, at which point the gilt would be redeemed at PAR value (£100) so you also receive £20584.

Total return would be £20584+(154.38*3)+interest on the coupons - around £11 if invested at today's interest rates - for a total of £21058, which works out at an annual return rate of 4.03% - exactly what yieldgimp says (ie £20000 invested for 476 days, with a total return of £21058)

older_and_no_wiser

MK62 said:

TG26 latest clean price is 96.82........latest dirty price (price inc accrued interest since last coupon payment) is £97.11.

If you invest £20000, you'd get 20000/97.11...........but there is also a bid/offer spread, so you'd likely pay c.97.16 today. You'd end up with 205.84 (gilts are priced per nominal £100, but they can be traded in £1 splits).
So you would get 75p*205.84=£154.38 in July25, Jan26 and July26, at which point the gilt would be redeemed at PAR value (£100) so you also receive £20584.

Total return would be £20584+(154.38*3)+interest on the coupons - around £11 if invested at today's interest rates - for a total of £21058, which works out at an annual return rate of 4.03% - exactly what yieldgimp says (ie £20000 invested for 476 days, with a total return of £21058)

I have an account with Interactive Investor and they are quoting realtime prices - which shows me exactly what I'll pay for TG26 - see below. Is this the clean price and what I will actually pay if I bought now?

Hoenir

Those are clean prices. 

cwep2

The ii platform doesn't work out the dirty price before trading - so the quantity is just an "estimate" and in reality it will be different because you will transact at the dirty price (not the clean price).

Two other things worth knowing, you pay tax on the coupons (like interest on savings) but not on the gains in price, so T26 or T26A with coupons of 0.125% and 0.375% respectively are even better for tax payers (and especially higher rate tax payers) - you can see this on YieldGimp - T26/TG26/T26A show gross yields of 3.54%/4.03%/3.93% respectively, but after 40% tax these are equivalent to 5.82%/5.69%/6.29% so although TG26 has best yield, after 40% tax it is worse than the other two. If you use the app you can put in 20% tax rate and see how that affects things if that is your situation.
Secondly you can knock off the "accrued interest" from the first coupon from the tax calculations - accrued interest is the difference between the dirty and clean price. This makes it "fair" in a simplified example if you buy something paying a 3.65% coupon (=0.01% per day) one day before the semi-annual coupon gets paid you would pay a price of the clean prince + 1.82% and then get paid a coupon of 1.83% the next day, so you don't pay tax on the whole 1.83% coupon, only the bit you "earned", essentially you take away accrued interest amount from coupon, so you need to keep track of these numbers.