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Flashcards in Government Bonds Deck (15)
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1

What are gilts

Fully securitised and registered UK gov sterling bonds

Issued by DMO on behalf of HM treasury

Security = low risk / safe / UK never defaulted

Mature market instruments

Traded on Listed REI and OTC

Suitable for private investors seeking low risks or institutional to match known future liabilities (pension funds)

Investor = creditor and Gov = debtor

2

Types of gilts

Conventional - coupons and principal amounts fixed

Index linked - coupons and principal sum linked to index/ inflation

3

Participants of Gilts

DMO
-agency of HMRC
-role to manage debt of gov
-objective to reduce cost of financing debt
-issuer of gilts in pri and sec markets/ controls issue and ensure market is liquid and solvent
-orderly and regulated markets and investor protection (mandate)
-controls dealer status, entry and exit of GEMMS and holds bonds itself to manage market

GEMMs
-primary market dealers/ market makers create place for buying and selling / set prices
-registered on RIE and authorised by FCA or under EEA passport
-Barclays, DB, Citigroup
-provide market intelligence to DMO, transfer to investors and provide daily prices
-pri market only bid through auctions (investors go through GEMMS) and sec market DMO deals directly with GEMMs

Inter Dealer Brokers (IDBs)
-broking firms endorsed by DMO but deal with GEMMs
-intermediates provide anonymous trading
-all info retained by GEMM and not distributed to public
-IDB not permitted to offer securities outside market and take principal positions in own account (unless matched system)

4

Purchase and sale of gilts

Fully tradeable securities

Prices fluctuate in market (int rates, S/D, inflation)

80% sale of gilts by pre announced auctions

Other sales include offering syndicates and mini tenders to enhance sale of long dated gilts

Post Auction Opening Facility provides successful bidders with option to purchase additional 10% @ strike price or agreed average

Electronic bidding

5

Outline methods of issuing

DMO auctions

1) investors bid directly through GEMMs who deal with DMO. Direct bidding links via Bloomberg system and telephone. Allocations to successful bidders @ bid price

2) of investors on approved official list of investors with DMO and apply directly through filling out an application form and apply

Different names of gilts represent departments issued from (Annuities, Treasury, Exchequer)
-since 05/06 all new gilts issued as treasury

6

Outline methods of selling

Original sellers which to sell through intermediaries which include stockbroker, banks, Computershare (DMO sale service provider)

Computershare holds and maintains ownership register for DMO

7

Rationale for issuing

1) Central Gov Net Cash Requirement is the diff in gov expenditure and gov income

2) annual repayment of maturing gilts (cycle of paying back and issuing new)

1998 market £71 bullion - 2014 =£1437 billion
Outlines vast gov deficit / gov trying to reduce by fiscal methods

Coupon payments represent cash outflow so gov must maintain high credit rating so can issue new

8

Classification of Gilts

Conventional (largest part of portfolio)
-fixed coupons and repayment of principal @ maturity
-safe investment
-£100 Nominal amount / £1000 purchased and traded at premium of discount

Index Linked
-coupons and principal linked to inflation/ ensure Investors return above inflation throughout duration
-small market as investors hold till maturity
-adjusted to take into acc accured inflation since issue (able to purchase same amount g/s with capital as could have at issue)
-traded clean prices
-coupons based on uplifted principal/ reflect rate of gov contrasted to borrowing rate therefore lower int & yield

Gilt maturities (classified according till time from purchase to redemption)
-shorts <7 Years, mediums 7-15years? Longs >15years

Double dated gilts
-gilts have two repeat ion dates/ flexible option for gov to redeem if favourable
-redeemed in part or full but must provide 3months notice to London gazette
-aug 2014 none o/s

Undated gilts
-no redemption date
-irredeemable / perceptual
-gov had option to redeem @ any time if wish to do so
-oldest issued 1853
-£1 m nominal o/s (8 issues)

Rump gilts
-o/s nominal amount is small
-GEMMs not required to make Market out of them, but DMO post bid prices if requested by holder
-7/8 o/s amounts = £654m

9

Gilt yields

Yield - return on a bond / income generated on annual basis expressed as % of purchase price

Flat Yield (coupon rate)
=coupon rate / bond NV x 100%

Interest yield (running yield)
=annual gross coupon / purchase price x100%

Gross Redemption Yield (GRY - yield till maturity)

=interest + or - (capital or loss / no years till maturity)

Work out IY and then consider profit or loss made / no years till redemption

Total yield on a bond incl coupon and final payment (allowing losses and gain over life of bond)

Loss = GRY < IY
Gain = GRY > IY

10

Outline assumptions of GRY

-total return on gilt if held to maturity
-no adjustments for tax liabilities
-dealing costs incurred not considered
-payments made promptly and reinvested at same rate

11

Outline how gilts priced

Price of gilts split into two compartments; capital amount and accured int since last coupon payment

Coupons paid semi annually therefore int accures daily and requires payment next coupon date

Clean price = assumes no accured int/ quote in press

Dirty price = assumes accured int/ if investor buys gilt after payment date / pays clean price + accrued int since last coupon payment

Ex Dividend = assumes no accured dividend

Cum Dividend = assumes accured Dividend about to be paid (entitled int previous 6months)

12

Outline the rules regarding purchasing and selling gilts period XD date

Cut off date when gilt becomes ex dividend (XD) to ensure registrar allows coupon payment to entitled party

7 days prior next coupon date (war loans 10days)

If investor purchases on or after XD coupon paid to previous holder - purchaser not entitled

Seller of the bond within this period receives all future coupon but pays portion back by recieveing less for sale (lower in market)

If gilt purchased before XD entitled to accured int rewarded in lieu for intervening period

13

What are Gilt STRIPS

The gilt Separate Trading of Registered Interest and Principal Securities

- known as gilt strip market

Gilts are strippable / broken down into two compartments principal and coupons / both elements can be traded separately

These are conventional fixed gilts

All new issues of conventional gilts are strippable

2 series; those that pay coupons June and December and those pay March and September

14

Outline taxation and settlement of gilts

Settlement
-electronic settlement system CREST
-ownered by Euroclear
-dematerialised form
-settlement T+1 (special T+3)

Taxation
-coupons paid gross (without tax deducted therefore good for non taxpayers)
-coupons taxable (declare on tax return)
-possible tax deducted @ source by application to registry/Computershare
-profit/ loss on disposal of gilt not taxable

15

Additional points of gilts

No stamp duty

Type of investor (risk adverse/ those require guaranteed return and known/ steady source of income - retired)

Buy and hold strategy provides for absolute return of capital and regular income flows

Coupon set at time of issue (won’t fluctuate with market rates - fixed)

No gov penalty for selling gilts prior redemption/ can suffer negative charges on int rates