Understanding Gilts: Two Types and Trading Conventions

In this article, we look at gilts, focusing in particular on the two different types available and two trading conventions. This is useful reading if you’re studying for the CII’s R02, J10 or AF4 exams.

This article is correct as at 24 October 2023.

What are gilts?

A gilt is a government bond issued by HM Treasury and listed on the London Stock Exchange. The UK government has never failed to meet interest or loan repayments on gilts and so they are deemed low risk.

Conventional Gilts

Conventional gilts are the main form of UK government bond, and they come with a promise of regular, fixed payments to bondholders every six months until the bond reaches its maturity date. When the bond finally matures, the holder receives a final coupon payment, along with the return of their initial investment.

These bonds are quoted in terms of their value per £100, which is the amount you receive when the bond matures. However, the actual value may fluctuate due to market conditions.

Each bond is identified by its coupon rate and maturity date, e.g. “1½% Treasury Gilt 2047.” The coupon rate is determined when the bond is issued and reflects the prevailing interest rate in the market at that time. It signifies the annual payment you receive for each £100 invested, paid out twice a year.

For example, if an individual owns £1,000 nominal of a “1½% Treasury Gilt 2047,” they receive two payments of £7.50 each on January 22nd and July 22nd every year until the bond matures on July 22nd, 2047. At that point, they receive their initial investment back, along with the last coupon payment.

Index-Linked Gilts

Index-linked gilts differ from conventional gilts as the half-yearly coupon payments and the amount you get back at the end are adjusted based on the UK Retail Prices Index (RPI) with a lag. This means they take into account how prices have gone up since they were first issued.

The coupon on an index-linked gilt shows how much money you’ll get for every £100 you hold, adjusted for RPI inflation from when it was issued to the coupon date. The amount paid therefore depends on how prices changed between those dates. When the gilt matures, you get back the initial money plus the last coupon, all adjusted for RPI inflation.

It’s important to note that because RPI can decrease, cash flows from index-linked gilts, accounting for inflation lag, may also decrease.

Accrued Interest

Accrued interest is the interest that accumulates on a gilt between two interest payment dates, often referred to as coupon dates.

• For example, if a 1% Treasury Gilt 2032 pays interest on January 31st and July 31st each year, and you buy it on 30th September (two months after the last interest payment on July 31st), you must compensate the seller for the interest that has accrued between July 31st and September 30th. This is because the seller won’t receive the next interest payment on January 31st.

Ex-Dividend Periods

Ex-dividend periods are specific timeframes leading up to the date when coupon payments are made to the registered holder.

• If you sell a gilt within an ex-dividend period, you receive the full interest payment, but you must reimburse the buyer for a portion of it. This is called rebate interest and is subtracted from your sale proceeds.
• If you buy a gilt during the ex-dividend period, you won’t receive the next interest payment, but you will have to pay for the accrued interest. You will therefore be eligible to receive rebate interest for the period between the settlement date of the transaction and the day after the ex-dividend period. The rebate interest is deducted from your purchase cost.

Grab the resources you need!

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Alternatively, you can download the taster resources for AF4 or J10 if you are studying for one of those exams.