MrFoolish wrote:I've found this, which is apparently popular on the ii platform:
https://www.ii.co.uk/bonds/ukgovt-of-5- ... 0/LSE:TR25I've never really looked at gilts before. Would I be right in thinking this one is about 3% above its redemption value, pays about 5% pa on the original price (which is similar to the current price) and would be getting the redemption value back in 2025?
Good buy? Bargepole? Roll the dice?
Welcome to the world of gilts MrFoolish!
As you may be noticing, getting data on gilts is not that easy, especially since the demise of the previously most useful site fixedincomeinvestor.co.uk which had some really useful data, and since changes to the Debt Management Office (DMO) web page. Here's a summary of sites I refer to:
1. My broker(s): for real-time quotes to buy and sell. Better to get an actual price than the indicative price quoted on most free sites.
2.
DMO website: they are effectively the issuers so the natural starting point for data. They have a wealth of current and historic info.
3.
Tradeweb: daily pricing service outsourced by the DMO. Free registration, then they have daily price lists
with yields and modified duration. Not sortable but you can export the data.
4. London Stock Exchange (LSE) web site: for daily price information with reasonable historic charts. Most of the basic information about individual gilts is there. Hopeless in other ways e.g. you can get a
list of gilts but it's practically worthless.
5.
Hargreaves Lansdown: Reasonable list of gilts, sortable, but no yields!
When it comes to choosing gilts the decision is easy (at an amateur level) and boils down to what duration gilt you want to buy. Short duration gilts are less volatile and in most circumstances offer a lower yield (but not now! -- the yield curve is "inverted" now because short-dated gilts yield more than longer dated gilts. This is usually a temporary phenomenon). Long duration gilts are more volatile but generally also yield more.
So you choose your risk, maybe thinking about the yield curve and economic environment, and select a gilt of the appropriate maturity from one of the lists. The coupon is not a major factor except in terms of taxation: the higher the coupon the more of your return will potentially be lost to income tax.
Now looking at the specific (2025 maturity) gilt you chose: if you want exposure to a three-year gilt then why not? The price won't move much compared to longer gilts (unless default comes into play). After three years the gilt matures and you need to reinvest.
Not intended as any sort of advice, but short gilts (<5 years) are where I have started buying. To me the yield curve inversion is a red flag for the longer gilts in the short term.
Good luck.
GS
P.S. With regard to accrued interest, you are not "compelled" to pay accrued interest on a bond. The price you pay is the price you pay (including all costs). What happens with the accrued interest is that often prices are quoted with the notional accrued interest backed out: a so-called "clean price". There are two main reasons for this: 1. because you have to pay tax on accrued interest so the value is explicit in the trade contract (under the Accrued Income Scheme rules) and 2. interest accrues daily so backing it out means the quoted clean price remains constant if nothing else changes; it helps with comparing prices from day to day, especially if yields are high. But always remember that the dirty price is the one you will pay. Note that preference share prices are normally quoted dirty: they pay dividends so they are not subject to Accrued Income Scheme tax rules.
