Government Bonds (Gilts)

Question 2 – The table below is an extract from existing Government Bonds (Gilts).

Issuer Coupon (%) Maturity Price
HM Treasury GBP | GB00BM8Z2S21 | BM8Z2S2 0.875 31 July 2033 92.275
HM Treasury GBP | GB00BMGR2791 | BMGR279 0.125 31 January 2024 97.370
Treasury 0.5% GILT 22/07/22 GBP1 GBP | GB00BD0PCK97 | BD0PCK9 0.500 22 July 2022 99.900
Treasury 0.75% GILT 22/07/23 GBP0.01 GBP | GB00BF0HZ991 | BF0HZ99 0.750 22 July 2023 99.130
Treasury 1,5/8% 22/10/2028 GBP | GB00BFX0ZL78 | BFX0ZL7 1.625 22 October 2028 101.140
Treasury 1.25% 2027 GBP | GB00BDRHNP05 | BDRHNP0 1.250 22 July 2027 99.100


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Answer the following questions:

1. What is the meaning of each of the columns above?

Column 1 indicates the issuer (UK Treasury), the currency and the code of the bonds/gilts

Column 2 is the coupon rate, i.e. the interest rate that applies to the face value of the bond to calculate the cash payment.

Column 3 is the date at which the bond expires or matures, i.e. when the principal is repaid by the issuer to the investor that owns them at the time.

(in reality, the information included in columns 2 and 3 is also included in column 1)

Column 4 has the bond price.

2. Why is one bond selling above £100 and all others selling below?

In the UK the face value of bonds is normally £100 and bond prices are a function of two interest rates: the coupon rate and the yield to maturity. If the coupon rate (indicative of the return you are receiving) is lower than the yield to maturity (which reflects the return you want to receive), then you are receiving less than you want, so you’ll be willing to pay less than the face value and the bond is selling “at a discount”. This is the case with all bar the 5th gilt, meaning the return required by investors to invest in short to medium term gilts is above 1.25%. The only bond selling “at a premium”, i.e. with a price above £100 is the one maturing in October 2028, which has a coupon rate of 1.625%, indicating that the yield to maturity of these bonds is below the coupon rate, so investors are willing to pay more than the face value to buy this gilt.

3. Considering the issuer is the same, why is the coupon rate different from bond to bond?

The coupon rate is fixed at the time the bond is issued and in, the majority of instances, it is a reflection of the rate being offered by bonds of similar level of risk on the market at the time of issue. As such, over time (especially for long term bonds, where market interest rates have longer to change) some coupon rates will be very different from the market interest rates.