Gilt yield

Gilt yields express the return on a gilt (government bond) as an annual percentage. There are two ways to do this. The income yield just looks at the annual coupon as a percentage of the price. So if the annual coupon is, say, £5 and the price is £90, the income yield is (5/90) x 100%, or 5.5%. This is useful to investors only interested in the income return.

However, for a more complete picture you can also use the gross redemption yield, or yield to maturity. This takes account of any capital gain or loss that arises between the date of purchase and the point the gilt is bought back by the government.

The actual calculation is fiddly, but as a rough approximation let’s say the earlier gilt matures in five years’ time. The annual capital gain to the holder is about £2 per year since all gilts redeem at a fixed £100. So the total annual return is ((£5 + £2)/£90) x 100%, or 7.8%.

This estimated figure does not take account of the time value of money, which would slightly reduce the number in practice.

 

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.