A gilt is a sterling-denominated UK government bond issued by HM Treasury as a conventional or index-linked security.
A gilt is a sterling-denominated UK government bond issued by HM Treasury through the UK Debt Management Office (DMO). Gilts are marketable securities listed in the UK market. Their contractual cash flows follow the issue terms, while their prices and yields can change continuously before maturity.
The DMO identifies two current broad types: conventional gilts and index-linked gilts. Historical consols, War Loan, and other undated securities should not be mistaken for a third current issuance category.
| Feature | Conventional gilt | Index-linked gilt |
|---|---|---|
| Coupon | Fixed cash amount based on nominal value | Adjusted under the issue’s RPI terms |
| Principal at redemption | Stated nominal amount | Adjusted under the issue’s RPI terms |
| Quoted yield focus | Nominal redemption yield | Real yield under indexation assumptions |
| Main price driver | Nominal rates, inflation outlook, supply, and demand | Real rates, inflation compensation, indexation, liquidity |
| Inflation protection | None in contractual cash flows | Linked to UK RPI, not every investor’s costs |
| Main detail to verify | Coupon, maturity, price, accrued interest | Base index, lag, index ratio, cash-flow method |
The DMO introduced a 3-month indexation-lag design for new index-linked gilts in 2005. Older issues use earlier conventions. The exact issue terms, rather than a generic “index-linked” label, determine the applicable calculation.
Conventional gilt prices are quoted per GBP 100 nominal. A 3% coupon means annual coupon cash of GBP 3 per GBP 100 nominal, normally paid in two equal installments. It does not mean a buyer paying GBP 94 or GBP 108 earns 3%.
Redemption yield, or yield to maturity, reflects price, remaining coupons, redemption value, and timing under stated assumptions. Current yield considers only annual coupon divided by clean price and omits the capital gain or loss toward maturity.
Assume an investor buys GBP 10,000 nominal of a conventional gilt with a 3.00% coupon at a clean price of 94.00.
GBP 10,000 x 94% = GBP 9,400GBP 300GBP 150GBP 300 / GBP 9,400 = 3.19%If accrued interest is GBP 60, settlement cash before fees is GBP 9,460. The 3.19% current yield is not redemption yield because it excludes accrued interest, payment timing, reinvestment assumptions, and the GBP 600 difference between clean price and nominal principal at maturity.
Gilt coupon entitlement depends on settlement relative to the ex-dividend date. A trade that settles during the ex-dividend period does not carry the upcoming coupon, even if the trade was agreed earlier. Accrued interest can become negative rebate interest during that period because the seller remains entitled to the coupon while compensating the buyer for part of the coupon period.
This is a material operational difference from simply adding positive accrued interest to every clean price. Investors should use the settlement date and registrar or DMO schedule for the specific gilt.
Index-linked gilts adjust semiannual coupons and principal using UK RPI with a lag. RPI can fall as well as rise, so adjusted cash flows can decline under the issue’s mechanics. The instrument hedges the specified RPI measure, not CPI, a personal cost basket, or every liability.
The simple nominal-minus-real yield spread is often called inflation compensation. It can also contain inflation risk premiums, liquidity differences, supply-demand effects, and imperfect maturity matching, so it is not an exact market inflation forecast.
Historical names do not establish current payment terms. Identify the exact stock, redemption provisions, and official notice.
This article is educational and is not individualized investment, currency, legal, or tax advice. Verify the DMO terms and current rules for the exact gilt and holder.