Bonds and gilts

Find out which bond or gilt could help you unlock your money’s potential.

What are bonds and gilts?

What is a bond?

A bond is a loan taken out by companies or governments. When you invest in a bond, you’re lending money to a company or government for a set period of time, and during that time you receive fixed interest payments called coupons.

Bonds work like an IOU – at the end of the time period you’ll get back the face value, which is the amount the bond was issued for. This is known as the bond maturing, and the repayment is called the redemption.

You can buy and sell bonds before maturity, so bonds have a market price which rises and falls as they’re traded.

You might buy bonds to bring low risk investments into your portfolio, to provide steady income, or to put chunks of money away knowing exactly how much you’re getting back and when.

There are two different types of bonds:

  • corporate bonds are loans to companies
  • government bonds are loans to governments, a loan to the UK Government is called a gilt.

What is a gilt?

A gilt is a bond issued by the UK Government. Because the UK Government is very unlikely to go bankrupt, gilts may be seen as a particularly low-risk investment.

You might invest in gilts to complement your more adventurous investments, and to provide a steady, reliable source of income. Gilts are also free from Capital Gains Tax so they’re useful for tax-efficient growth, especially if you’ve used up your ISA and SIPP allowance.

However, because they’re so low-risk, they usually offer lower yields than other bonds.

Browse our bonds and gilts

Key concepts explained

  • An index-linked gilt differs from a regular gilt because its interest payments are linked to the current Retail Price Index in the UK. This means that the interest payment goes up or down in line with UK inflation.

    You might use index-linked gilts to protect your income from inflation until the bond matures.

    However, index-linked gilts often have a long time to run to reach maturity, and the buying/selling price in the meantime can go up or down, especially if inflation rates rise or fall a lot.

    Some companies also offer index-linked corporate bonds, but they’re usually offered by governments.

  • When you look at investing in a bond, the maturity date will be stated. This is the agreed end date of the loan, which is set when the bond is first issued and doesn’t change. The maturity date is when you will receive back the face value of the bond.

  • As well as its maturity date, you’ll also see something called the coupon stated on a bond’s information page. The coupon tells you what income you’ll receive from a bond each year you hold it, usually paid twice a year, until maturity.

    The coupon is shown as a percentage of a bond’s face value, which is set when the bond is first issued and doesn’t change. What this means is, every year you hold the bond, you’ll receive income payments of a set amount of the bond’s original value.

    For example:

    If a bond is issued at £100 face value and pays a 1.5% coupon, you’ll get an income of £1.50 per year.

  • A bond yield tells you how much income you’ll make on your investment in the next year, based on what you paid for it. When looking at buying a bond, you’ll see the bond yield as a percentage – this is the income payment shown as a percentage of the current market value.

    The bond income is fixed and doesn’t change, but the price you pay for the bond can go up or down. This means the income you get compared to the amount you invested can be higher or lower.

    For example:

    A bond is issued at £100 face value and pays a 1.5% coupon, so the fixed income is £1.50 per year.

    If you buy that bond at a market price of £80, the £1.50 income you receive that year is 1.9% of what you paid.

    Therefore, the bond yield is 1.9%.

 

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