Finance

Gilt-Edged Securities

Gilt-Edged Securities

Gilt-edged securities are high-grade bonds that are issued by some national governments and private organizations issue to generate revenue. As the name suggests, gilt-edged securities refer to high-quality items whose value remains more or less constant over time.

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What are Gilt-Edged Securities?

The term ‘gilt’ is of British origin. The bonds and securities issued by the Bank of England on behalf of his/her majesty’s treasury were called ‘gilt-edged securities as their paper certificates had a gilt edge. Gilt-edged securities in India are government securities as they are risk-free like British Government securities. In the US these types of securities are called US Treasury securities.

Purpose of gilt-edged securities:

Gilt-edged securities are high-grade investment bonds offered by governments and enormous corporations as a way of borrowing funds. The institutions that issue these securities have consistent earnings that can cover dividends or interest payments. In many ways, these are the next safest bonds to Government securities. A conventional gilt issued by the UK government pays the holder a fixed cash payment semi-annually until maturity, at which point the principal is returned in full. The coupon payment reflects the market interest rate at the time of issuance and indicates the cash payment that the holder will receive each year. The duration of these assets can go up to 30 years. After the 2008 recession, large quantities of gilts were created and repurchased by the Bank of England, in its campaign to help jump-start relief efforts.

Advantages:

Gilt-edged securities are issued by the central government so the investment under these funds is considered to be less risky than corporate bonds and it offers better returns than direct investment. They are typically tied to interest rates. Also, they are ideal investments for retirees seeking reliable returns with minimal risk. It is important to the government and society in different ways. To the government, they will need to issue gilts to raise capital for their growing country. For society, if gilts did not exist or the yields rose the government might need to raise taxes because they would have to find another way to pay for the infrastructural needs.

Disadvantages:

Although gilt edges securities are offered by reliable government bodies and large corporations, they present certain drawbacks. The bonds tend to fluctuate with the interest rates, when the rates increase the price of the gilt declines and vice versa. As the global economic conditions are improving rates are poised to bounce off near-zero levels which means gilt funds are likely to experience a tumultuous ride. For this very reason, investors look to generate substantial returns which may source better value in index funds. They are not 100% secure. They are quite ill-liquid as these types of funds are not actively traded like other securities.

Limitations:

  • The gilt-edged bonds tend to fluctuate with interest rates. Rate hikes will cause the price of a gilt to decline and vice versa.
  • With global economic conditions improving, rates will bounce off near-zero levels, which means gilt funds are likely to experience a turbulent ride. Hence, investors looking to generate substantial returns may source better value in index funds.

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Bottom Line:

A gilt instrument gives better asset quality than equity and other debt instruments, although the returns might be relatively lower. Because the returns are highly dependent on the movement of interest rates, a falling interest rate regime would be the best time to invest in gilt funds. Gilt-edge securities are typically tied to interest rates and so are ideal investments for retirees seeking reliable returns with minimal risk.

 

Author – Abha Shetty

About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.

 

Related:

Hybrid Securities

Treasury Inflation-Protected Securities

Investment Securities

 

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