July 30, 2014

GILTs explained

The concept of a bond is simple. It is a loan that an investor makes to either a government or a company (Corporate bond) in order to help the respective parties raise funds. The benefit for the investor is that the issuer of the bond agrees to pay you a FIXED level of return for a number of years depending on the type of the bond.

Government bonds are also known as Gilts within the United Kingdom. Gilts enable the British government to help raise revenues. As the Government issues the bond, Gilts are viewed as having a higher chance of total repayment than those offered by corporate bonds. Although, this lowered level of risk also means that the Gilts usually offer a lower rate of return and are potentially less financially rewarding than corporate bonds.

It is not just the UK that offers Government bonds, in Germany they are referred to as ‘Bunds’ while in the USA they are referred to as ‘T-Bills’. Despite geographical variances in the individual names for a Government bond, the term ‘sovereign debt’ is universally accepted for all regions.

Therefore, in comparison to a Corporate bond, Gilts are potentially less risky and pay ‘coupons’ twice a year, whereas corporate bonds pay ‘coupons’ once a year. A coupon refers to the amount of interest paid out expressed as a percentage of the full loan amount.