Bonds and Gilts
Investing in bonds and gilts with interactive investor.
How bonds and gilts work
Bonds and gilts are typically low risk fixed income investments which can take pride of place in any portfolio. Corporate bonds are issued by corporations and gilts are bonds are issued specifically by the British government to borrow money.
There are different types of gilts but most will typically pay a fixed coupon biannually and mature on a set date in the future. Other options are Index-linked gilts which track the Retail Price Index (RPI) or you can buy undated gilts, where there is no fixed redemption date.
Bonds and gilts are normally issued at £100 each and pay back £100 on their redemption date, plus you’ll receive interest (the coupon) at a fixed rate each year until then. You can also trade them on the secondary market where the price will be typically dictated by market forces such as supply and demand as well as interest rates.
If you hold a bond until expiry it will be redeemed at its face value of £100 so a gain or loss on the principal holding will depend on whether you paid above or below £100 on the secondary market.
All gilts and some corporate bonds are exempt from capital gains tax (CGT). However, unless your bonds are held in an investment ISA or other tax-free wrapper products, you will still be liable to pay income tax on any interest you earn.
When buying bonds, you should consider the issuer’s credit rating and their ability to repay their debt. This will have a direct bearing on the value of the investment. Should the issuer default, they may not make interest payments or be able to repay your money and your initial investment is at risk.