In contrast to dividends declared on shares, a Gilt brings you income by way of interest on your capital; the amount of income you receive is set according to the 'coupon rate' for the individual Gilt.

But one of the biggest differences between Gilts and Equities is that if you hold a Fixed Rate Gilt to maturity you can be sure of the amount you'll get back; this is because a Gilt should always mature (or be 'redeemed') at its nominal value. In the case of Index-linked Gilts, the maturity value will be on the basis declared in its initial terms of issue. If, however, you sell your Gilt before maturity its price can rise and fall dependent on the market's view of interest rates.

The UK Debt Management Office took over responsibility for issuing Gilts on behalf of the Government in April 1998 and you can find more information about Gilts in general from their website: www.dmo.gov.uk

Fixed Rate Gilt/Conventional Gilt:

A Gilt where the interest rate you receive is fixed from the start, e.g. Treasury 5% 2012.

Index-linked Gilt:

A Gilt where the interest rate (and the final capital value) you receive is influenced by inflation, e.g. Index-Linked Treasury 2½% 2016.

Nominal value:

the face value or amount of the Gilt, and the capital amount you receive on redemption of a Fixed Rate Gilt.

Uplifted Nominal value:

The nominal value of Index-Linked Gilts adjusted by inflation since the Gilt was issued.

Consideration:

The price you pay / receive on purchase / sale, including an element for accrued interest.

Redemption date:

The date on which your capital is repaid to you. Most conventional Gilts have a specific redemption date; for details visit www.dmo.gov.uk/gilts/data/f2dat.htm.

Dated Gilts:

A Gilt where there is a firm redemption date, e.g. Index-Linked Treasury 2½% 2016.

Undated Gilts:

A Gilt where there is no stated redemption date, e.g. War Loan 3½%.

Double-dated Gilts:

A Gilt where the Government chooses the exact timing of redemption, at a point between the two dates shown, giving 3 months notice, e.g. Treasury 7¾% 2012-2015.

Short-maturity Gilt:

A Gilt with up to 5 years to maturity.

Medium-maturity Gilt:

A Gilt with between 5 and 15 years to maturity.

Long-maturity Gilt:

Gilts with more than 15 years to maturity.

The coupon:

The annual rate of interest paid on the Gilt, usually in two equal, half-yearly installments. Interest is expressed as a percentage of £100 nominal, e.g. Treasury 5% 2012.

Accrued interest:

The amount of interest earned on a Gilt since the last interest payment date, which is paid /received in addition to the 'clean' price at the time of buying /selling the stock. The exception to this is when you buy once the Gilt has gone 'ex-div': in this circumstance you are not entitled to the interest payment and hence accrued interest is deducted from the price. You will, however remain entitled to the accrued interest if you sell after the 'ex-div' date.

Clean price:

The quoted price of the Gilt excluding the value of accrued interest. It is this price which is usually quoted in newspapers; except when trading in ex-div Gilts, you will need to add the value of accrued interest to the clean price in order to calculate the overall consideration / receipts.

Dirty price:

The total price paid / received on a Gilt, equating to the clean price plus an adjustment for accrued interest.

Interest yield/Flat yield:

Your income based on the actual purchase price of the Gilt, rather than the nominal value. Calculated by dividing the coupon by the current price.

Redemption yield:

The total return if you hold the Gilt to maturity. Includes an adjustment for the effect of a price moving closer to the nominal value as the maturity date draws nearer.

Flat Yields and Redemption Yields are published in daily newspapers such as the Daily Telegraph, and you can use these to assess the regular income and total return you will receive on your investment.

When it comes to Undated Gilts (such as War Loan 3½%.), it is unlikely they will be redeemed, and so they are best assessed with reference to their Flat Yield only.

Let's illustrate investment in Gilts with a couple of examples:

Conventional (Fixed Rate) Gilts example

Say you invested £1,000.00 (excluding dealing commission) in Treasury 7¾% 2012-2015 at a price of £119.25p (plus accrued interest), on 15/9/2005.

Your £1,000 would have bought you £830.00 nominal of stock in this Gilt.

This is calculated as follows:

the amount you want to invest (£1,000.00) divided by the Market price (£119.25) plus 56 days of accrued interest of £9.788.

There is no Stamp Duty payable on Gilts and your dealing commission, based on the total consideration at the Standard Share Account tariff, would be £9.99.

Whilst the coupon is 7¾%, the 'flat yield' on your investment would have been 6.43%: this is calculated by dividing the coupon rate (7¾%) by the purchase price (£119.25 + £1.79), reflecting the fact that you've paid £121.04 for every £100 of nominal value.

While the market price may rise and fall over the intervening years, your holding will eventually be redeemed at £100 if you hold it to maturity. The Government chooses exactly when to 'redeem' the stock between 2012 and 2015: if they can borrow equivalent money cheaper, they will probably redeem earlier: if borrowing costs at the time are higher than 7¾%, it's more likely to be the later date.

So your total return to maturity (the 'Redemption Yield') includes both your 'Flat Yield' and a negative adjustment for the annual effect of the price reducing from £119.25 to £100 over the next 7-10 years.

As regards market price movements, the key point to remember about Gilts is that if their Redemption Yield rises, the price falls - and vice versa. So your expectations for long-term interest rates are critical to your investment decisions.

Index-linked Gilts example

These operate completely differently to Fixed Rate Gilts, because both the interest payments and the redemption amount are primarily influenced by inflation.

Say you now invest £1,000.00 (excluding dealing commission) in Index-linked Treasury 2½% 2016 at a market price of £256.15 (plus accrued interest), on 15/9/2005. Your £1,000 would have bought you £389.00 nominal of stock in this Gilt.

This is calculated as follows:

the amount you want to invest (£1,000.00) divided by the Market price (£256.15) plus 56 days of accrued interest of £3.48. There is no Stamp Duty payable on Gilts and your dealing commission, based on the total consideration at the Standard Share Account tariff, would be £9.99.

This time, however, the calculations to determine Flat Yield and Redemption Yield are significantly more complex. The coupon rate is adjusted for the movement in the Retail Price Index since its launch, whereas the Redemption amount has also been, and will continue to be, adjusted by inflation/deflation over the years to maturity.

To be more precise, each Index-Linked Gilt has an 'index number' that relates to its base index, i.e. the level of the Retail Price Index (RPI) 8 months before the Gilt was first issued. The value of interest payment and the final capital repayment can be calculated by comparing the base index with the level of the RPI 8 months before payments are due.

However, so far as market price movements are concerned, you should bear in mind that Index-linked market prices vary with the market's expectations on inflation: prices tend to rise if there's an expectation of higher inflation.

Keeping track of Gilt prices

Prices are quoted in the financial press and there is a regular section in the FT Companies and Markets section every Saturday. Prices are also shown on many investor websites, including Bondscape (www.bondscape.net). Price histories can be accessed via the DMO website (www.dmo.gov.uk).

Normally we’ll show the last closing price in your account, where this isn’t available call our dealers for the latest price.

Bid/offer spreads apply to trading in Gilts as they do for equities but are generally much tighter; it is not unusual to deal on spreads of just 10p per £100 of stock.

So, when looking at Bonds you need to assess the risk associated with the issue, looking at the issuer's ability to pay its debts, i.e. to make the payment of interest when due and to repay your capital at the maturity date. Of course Bonds have higher priority than Equity in any winding up, so for bond payments to be in trouble there would be a serious problem for the company as a whole and, therefore, for its Equity shareholders too.

Most corporate bonds are rated for risk by Credit Rating agencies such as Standard & Poor's or Moody's, as follows

Highest quality	Aaa	AAA
High quality	Aa	AA
Upper medium	A	A
Medium	Baa	BBB
Lower medium	Ba	BB
Low	B	B
Poor quality	Caa	CCC
Most speculative	Ca	CC
No interest being paid or bankruptcy	C	C
In default	C	D

Like Gilts, Bonds pay interest, typically half-yearly. Interest can be either at a fixed rate or at a 'floating' rate relative to the Bank of England Base Rate. You may also come across 'zero-coupon' bonds where interest is not paid on the bond but the price is typically below the redemption price, thereby offering a redemption yield in place of a flat yield.

Bonds are also categorised according to their maturity date, with short-term bonds maturing up to 5 years, medium term 5 - 12 years and long bonds 12 years or more. Tax status of Gilts and Bonds

Interest on Gilts is paid gross of UK tax and is, therefore, to be declared on your annual Tax Return. For non-taxpayers the payment of gross interest is a useful feature and saves the need to reclaim tax that would otherwise have been deducted at source.

However, with a Bond, interest is taxed at source, at the basic rate. Non-taxpayers can reclaim the tax deducted and higher-rate taxpayers will be assessed for the additional tax due as part of their annual return.

Capital gains on both Gilts and Bonds are free of Capital Gains Tax (CGT).

Both types of investment may be held in ISAs so long as at the time of purchase they have 5 years or more to run until maturity. And whilst the 10% tax credit on dividends from equities held in ISAs was removed in April 2004, the 20% tax credit on Bonds continues.