Gilts and the interest rate rise

Following recent announcement by the Governor of the Bank of England stating interest rates may rise this year, anyone holding a large number of Gilts should contact their financial advisor and consider their position in the market, as when interest rates go up the value of Gilts falls.

Gilts are bonds issued by the UK (or other) governments to fund its debt. Gilts are normally redeemed at face value between specified dates, which may be 5, 10, or even more years away. They are called gilts because in the old days, loans to the government would be secured with the government's real gold, and became known as 'gilt edged'. 

The interest rates are generally low compared to other types of investments, as they are about the most 'risk free' investment you can make. Because the bonds have a fixed interest rate and a fixed date to cash them in, while interest rates in the market are fluctuating all the time, the actual market value of the bond an investor holds will go up and down from time to time. If a bond is going to pay out at £105 in a year, and interest rates are 5% the bond would probably cost you £100 to buy. But if prevailing interest rates in the market suddenly increase, your bond will fall in value - why would anyone pay £100 to get £105 in a years’ time when they can get 10% in the market. You don't actually have to hold a bond until it matures, as they are tradable.

If you would like to discuss this matter or indeed any other matter relating to your investor visa  please do not hesitate to call, if you would like to consider some action with regard to this matter we can arrange a meeting with the appropriate financial advisor who will be able to give you detailed advice.

Posted in English on Jun 15, 2014.