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.

 

Merryn

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