Gilt Government Bond Question Inaam124

#1
Hi, sorry if this has already been asked as I couldn't seem to find anything on it.



I am a economics student in my first year. We recently learned about bonds and I have been doing my own studying, however, I can't seem to find an answer to my question.



So, if I invested £100 into a gilt bond for 5 years for example that received a coupon of say £4. Let's says interest rates rose causing the bond to be worth less leading up to maturity. At the maturity date would i still recieve the £100 back even though the bond is worth less on a secondary market?



Thank you.

#2



Hi, sorry if this has already been asked as I couldn't seem to find anything on it.



I am a economics student in my first year. We recently learned about bonds and I have been doing my own studying, however, I can't seem to find an answer to my question.



So, if I invested £100 into a gilt bond for 5 years for example that received a coupon of say £4. Let's says interest rates rose causing the bond to be worth less leading up to maturity. At the maturity date would i still recieve the £100 back even though the bond is worth less on a secondary market?



Thank you.
Originally posted by Inaam124


You would certainly receive the £100 back but your comment 'even though the bond is worth less on a secondary market' would not apply because as bonds approach maturity, open market values and face value converge.

#3
Ah, thank you for that.



As a student who has saved up some money, would you recommend in investing in gilts? I would not be planning to sell them at any point before maturity?

#4



As a student who has saved up some money, would you recommend in investing in gilts? I would not be planning to sell them at any point before maturity?
Originally posted by Inaam124


You are joking right? You have seen the YTM on offer, yes? As a consumer you have access to better rates on cash. Leave Gilts to those who are forced to buy them.

#6



Hi, sorry if this has already been asked as I couldn't seem to find anything on it.



I am a economics student in my first year. We recently learned about bonds and I have been doing my own studying, however, I can't seem to find an answer to my question.



So, if I invested £100 into a gilt bond for 5 years for example that received a coupon of say £4. Let's says interest rates rose causing the bond to be worth less leading up to maturity. At the maturity date would i still recieve the £100 back even though the bond is worth less on a secondary market?



Thank you.
Originally posted by Inaam124


If you purchase a bond with face value of £100, then you will receive back £100 upon maturity, and all the coupons in the meantime.



However, given current interest rates, you will have to pay much more than £100 to purchase this bond in the first place.

#7
So Treasury 4% 2022 has a redemption date of 7 March 2022, in 5 years time. The current price is £117.78 per £100 of stock, coupon is 4%, with a redemption yield of 0.41%, according to the FT.



A guaranteed return? Yes

A good return? No.



Because if the annual rate of inflation exceeds the redemption yield, you've made a loss in real terms. Latest CPI was 1.8% and RPI was 2.6%.

#8
Indeed, yields on UK gilts are much lower than interest rates you can get in a standard savings account right now, let alone what you can get through judicious use of interest paying current accounts. So it makes no sense for the average retail investor to buy them intending to hold them to maturity, as essentially does the same job as a fixed rate savings account, just not as well. The reasons for buying them are (a) you don't plan to hold them to maturity and are hoping for a capital gain (but then you also risk a loss) (b) you have such large sums to invest that standard Bank accounts are not appropriate or (c) the money's held in a pension so can't go into a standard Bank account (though in that case a bond fund is likely to be more appropriate than individual bond for most people).

#9



(c) the money's held in a pension so can't go into a standard Bank account (though in that case a bond fund is likely to be more appropriate than individual bond for most people).
Originally posted by Aretnap


Not if the Bond fund charges 0.25% against YTM on gilts of less than 0.5%, you end up losing half of the paltry income to the fund manager. That's why I bought TR18 for the wife's pension which I think had YTM of around 1% at the time I bought (she didn't want anything that could fall in value which is fair enough). There are corporate bond funds that offer more yield but with more risk; you takes your chances.

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