Definition of Gilts
The bonds issued by Government to raise funds are called Gilts. Since they are issued by Government hence they are considered to be low risk investments. It are normally linked to the bonds specifically UK Government release but the term can be used and known in general. But until unless specified Gilts refer to UK Government bonds.
It normally have maturity period as follows:
- 0 to 7 years and are called short term bonds
- 7 to 15 years and are called medium term bonds
- 15 plus and are called long term bonds
Mainly there are two times of gilt bonds offered
- Conventional Gilts
- Index Linked Gilts
Brief Explanation of Gilts
These Gilts are said to represent major percentage, usually around 75 %. These are simple bonds in which Government pays fixed amount of interest to its investor on interim basis until the bond gets matured. On maturity the investor receives his final interest amount along with the principal amount as well. The normally have coupon rate and maturity year mentioned on it.
It brings a fixed investment and hence is a safe or less risky investment.
Indexed Linked Gilts:
The remaining percentage i.e. one quarter in the Gilts portfolio are the Indexed Linked Gilts. As the name suggest these bond’s interest and principal amount both fluctuate with the inflation. These are designed to incorporate variation of UK price index during the period.
Like conventional bonds these bond’s interest is also paid on interim basis and upon maturity final interest and principal amounts are paid back to investor. But as stated above interest and principal amount both fluctuate to reflect inflation over the time.
Hence these are a bit risky investments as it all depends on the Market price of the currency or pound (you say). But as it is said higher the risk higher the return.