Gilt-Edged Stocks / GILTS
Gilt-edged stocks or GILTS are government bonds. Essentially these are 'loans' to the government, which they guarantee to repay after the investment period. In return for your loan, the government pays you fixed returns on your capital, twice a year throughout the investment period. Gilts are seen to be extremely safe investments, since it is unlikely that the government will file insolvency and be unable to repay you your money. However, gilts are also bought and sold on the stock market and thus their value can rise or fall. You are not guaranteed to receive all your capital at the end of the investment period. Gilts can be purchased for investment periods of between one and fifty years. They are usually purchased for periods of five, ten, or thirty years. You can choose to keep your bond for the duration of its investment period or sell it, usually without charge. The name of the gilt will indicate its maturity date and its rate of return, for example, 5% Treasury Gilt 2020. Returns will be paid on gilts every six months: the rate of return quoted is the annual rate of return, and so every six months a payment will be made to the value of half the quoted rate. For 5% Treasure Gilt 2020, a 2.5% payment would be made every six months.
In addition to conventional gilts, you may wish to invest in an index-linked gilt. These gilts are linked to the retail price index, or RPI. This is the index of average prices, and the value of the index-linked gilt and its returns will both be adjusted in line with this index. Your investment is protected from inflation, and will retain its buying power in the future.
If you wish, you can choose to strip down your gilt into its constituent parts and sell these off individually. This is known as gilt stripping: Separate Trading of Registered Interest and Principal Securities, or STRIP. Each bond can be divided into its 'principal', that is, the value of the gilt that is repaid at the end of the investment period, and its 'individual cash flows', that is, its six monthly return payments. An eight year gilt has one principal and sixteen individual cash flows: seventeen constituent parts which could be sold off separately as what are known as zero coupon bonds.
