Advertisement

Gilt yield

Gilt yields express the return on a gilt as an annual percentage.

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020
Visit/glossary/600702/emerging-markets
Glossary

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020