What is a gilt in finance?
Gilts are a type of government bond issued to raise money. As the government is unlikely to default on its payments, gilt-edged securities are considered one of the safest long-term investments. Their lower risk consequently carries low yields.
The term gilt originated in Britain, where the Bank of England issued debt securities on paper certificates with a gilt edge. Gilt-edged securities are used in several Commonwealth countries, like India and South Africa, but the term is mostly used in the UK.
Gilts are the equivalent of US Treasury securities and can be of two types.
Types of gilts:
- Conventional gilts:
Regular nominal bonds that promise to pay a fixed coupon rate every six months. When the gilt reaches maturity, its holder is paid the final and principal coupon.Usually, a coupon rate of a conventional gilt typically approximates the market interest rate at the time of issuance. Conventional gilts have established maturities, which are five, ten and 30 years from the date of issuance.Nonetheless, the Bank of England has issued ultra-long conventional gilts maturing in 55 years or even undated gilts, which are very rare.
- Index-linked gilts:
Represent bonds with borrowing rates and principal coupon payment linked to the ups and downs in the inflation rate.Index-linked gilts make payments every six months with one principal payment upon maturity. Because the UK retail prices index is used as a proxy for inflation, the coupon rates are adjusted upon it.The higher the inflation rate, the higher the coupon payment on index-linked gilts. For gilts issued after September 2005, coupon rates are adjusted based on the inflation rate published three months before, while securities issued before September 2005 use an eight-month indexation lag.
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Category: Financial Glossary