What Are Gilt-Edged Securities?
Let me explain to you what gilt-edged securities are: they are high-grade bonds issued by certain national governments and private organizations. In the past, these referred to certificates issued by the Bank of England on behalf of Her Majesty's Treasury, named because the paper featured gilded edges.
By definition, gilt-edged means a high-quality item with stable value over time. As investments, they are high-grade securities with low yields compared to riskier options.
These were once issued only by blue-chip companies and governments with strong profit records. Besides conventional gilts, the British government issues index-linked gilts with inflation-adjusted semi-annual coupons.
Government bonds in the UK, India, and other Commonwealth countries are still called gilts.
Key Takeaways
- Gilt-edged securities are high-grade bonds issued by some governments and organizations to generate revenue.
- Also known as gilts, they were originally issued by the Bank of England.
- The name comes from certificates printed on paper with gilded edges.
- They are favored for predictable returns with low default risk.
- They share features with US Treasury securities.
Understanding Gilt-Edged Securities
I want you to understand that gilt-edged securities are high-grade investment bonds from governments and large corporations for borrowing funds. These issuers have strong earnings records to cover payments, making them nearly as safe as US Treasuries.
The UK and other Commonwealth nations use them like the US uses Treasury bonds. A conventional UK gilt pays fixed cash biannually until maturity, when principal is returned. The coupon reflects the issuance interest rate.
Durations range from a few years to 50 years. Post-2008 recession, the Bank of England created and repurchased many gilts for economic relief.
Fast Fact
About 20% of all UK gilts are held by pension funds.
Limitations of Gilt-Edged Securities
Although issued by reliable entities, gilt-edged securities have drawbacks. They fluctuate with interest rates: rises cause prices to drop, and falls cause increases.
In improving economies, rising rates can make gilt ETFs and funds lose value. Investors seeking high returns then might prefer index funds.
Their main advantage is the tie to interest rates, making them suitable for retirees wanting reliable, low-risk returns.
What Does Gilt-Edged Mean in Business?
In business terms, gilt-edged refers to high-quality, low-risk financial products, typically top-value securities, most associated with UK government bonds.
Why Is It Called 'Gilt'?
UK government bonds are called gilts because original certificates had gilded edges, leading to the term gilt-edged security.
What Are the Advantages of Gilt-Edged Securities?
The primary advantage is their safety: low-risk with better quality than equities, but low yields. For higher yields, consider riskier options like stocks or high-yield bonds.
The Bottom Line
Gilt-edged securities are high-quality bonds from governments or blue-chip companies, mainly linked to the UK like US Treasuries. If you seek safe, low-yield investments, consider gilts.
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