GILTS - UKT 0.875 01/46

MemorableOstrich696

Hi. I've been following GILT prices for a while now and am thinking of buying the above. As I'm new to it, I'm just checking: I can buy a GILT originally issued at £100 for £43.79? I get 0.875%, so 87.5 pence for every GILT I buy (as a coupon annually which is paid half yearly). In Jan 2046 I would receive £100 for each GILT I bought for £43.79. Is this all correct? Also, can anyone provide a calculation to work out the yield (if bought for £43.79) please? Thanks

DRS1

Gilts in Issue - giltsyield.com

I thought I'd posted this already but obviously not.  Just scroll down to the one you are looking at.

MemorableOstrich696

Thanks DRS1. So, just checking, are my assumptions above, in your opinion, correct? 
In the case of the document you've posted, are you able to explain the difference between Gross Yield, DMO Yield and Net Yield please? I thought Gross & Net would be 20% (tax) difference but this doesn't seem to be. I'm planning to hold the GILTS in a SIPP, so no tax to pay (as my pension is below the Personal Allowance and I'd only take out to ensure it stays below the Personal Allowance). Is this your understanding?

MemorableOstrich696

Sorry, also want to check my understanding of how much £ I would actually receive. Usually for yield you just multiply by the sum invested but is yield per GILT, so you multiply the number of GILTS by the yield to calculate the £ amount one would receive annually (then divide by 2 as coupons are paid every 6 months)?

InvesterJones

MemorableOstrich696 said:

Sorry, also want to check my understanding of how much £ I would actually receive. Usually for yield you just multiply by the sum invested but is yield per GILT, so you multiply the number of GILTS by the yield to calculate the £ amount one would receive annually (then divide by 2 as coupons are paid every 6 months)?

Click on the 'flows' tab and adjust the units to match the amount you're buying.

DRS1

MemorableOstrich696 said:

Thanks DRS1. So, just checking, are my assumptions above, in your opinion, correct? 
In the case of the document you've posted, are you able to explain the difference between Gross Yield, DMO Yield and Net Yield please? I thought Gross & Net would be 20% (tax) difference but this doesn't seem to be. I'm planning to hold the GILTS in a SIPP, so no tax to pay (as my pension is below the Personal Allowance and I'd only take out to ensure it stays below the Personal Allowance). Is this your understanding?

First thing the gilt you have identified is one I would have thought was better in a GIA because it is a relatively low coupon gilt.

I have no clue about DMO yield - others on here will.

The reason you don't see a 20% difference between gross and net is because of how the gilt delivers its returns.  Only the coupon is subject to income tax and as the coupon is low the 20% tax is only on a small amount of the return.  The rest of the return is the gain on maturity and that is free of CGT.

That is why low coupon gilts are said to be good for higher rate tax payers (in a GIA).

But if you are putting it in a SIPP (or an ISA) then all the return is tax free (set the tax rate to zero for that) and you may do better with a higher coupon gilt.  In particular you will get more of the return earlier - ie when each coupon is paid.  You don't have to wait for a big lump on maturity.  And who knows if you will actually be around in 2046 to see that maturity.

Second thing is if you do look at a higher coupon gilt try to avoid ones where the clean price is over 100.  You will lose a bit of capital when they mature.  This is only really an issue for short term gilts (eg TR28)

Third yes you are right the coupon is paid every 6 months (and you get half the annual amount - so if the annual coupon is £1 you get 50p in one month and 50 p six months later).  Also don't forget that you (usually) pay for the accrued interest (eg the one you identified has 34 days accrued interest £0.081 so that is added to the clean price to give you the dirty price which is what you pay).  That accrued interest can be deducted from the first coupon you receive for tax purposes (assuming you hold in a GIA and actually pay income tax on the coupons).  If you buy in a SIPP or ISA it is no use - it just makes the gilt that bit more expensive.

Dirty prices get a bit more complicated if you look at index linked gilts.  There the clean price is really no guide to the amount you have to pay 

Why might you think about buying index linked gilts?  Well that £100 you get back in 2046 for the gilt you are looking at will have been eroded by inflation over the intervening 21 years and who knows it may be worth £40 in todays money.

Final thought - you may say well I can sell that gilt before 2046.  Yes you can but you don't know what price you will get for it.  The closer you get to 2046 the closer it should get to 100 but if interest rates move the wrong way it could go down in value.  Of course if they move the other way (maybe negative interest rates?) then it could be worth more than 100!

Someone will be along to tell me that I am wrong to talk about interest rates and it is something else which affects the gilts prices.

OldScientist

MemorableOstrich696 said:

Hi. I've been following GILT prices for a while now and am thinking of buying the above. As I'm new to it, I'm just checking: I can buy a GILT originally issued at £100 for £43.79? I get 0.875%, so 87.5 pence for every GILT I buy (as a coupon annually which is paid half yearly). In Jan 2046 I would receive £100 for each GILT I bought for £43.79. Is this all correct? Also, can anyone provide a calculation to work out the yield (if bought for £43.79) please? Thanks

Yes, you are correct about the cashflows.

If you want another way to calculate yield, the excel function yield will do so (see https://support.microsoft.com/en-gb/office/yield-function-f5f5ca43-c4bd-434f-8bd2-ed3c9727a4fe  - although look at the example to ensure you use the function correctly).

I too am slightly puzzled as to the difference between the yield and the 'DMO yield' on https://giltsyield.com/bond/ except that the former appears to be the 'total return of the bond if held to maturity' (which is return and not yield).

Note that yield is not equal to total return (although it will be close enough for a low coupon gilt).

ChilliBob

Yield gimp app is good if you are getting into Gilts. You can change your interest rate from 20% to 40% to get the net rate for you.