I was considering purchasing some treasury stock. I know this comes in multiples of £100 blocks.
The questions i have are why are they offered at different interest rates, some are only around 5% and others are at 13%. Why would you therefore get one at say 5%?
Furthermore do they have to be kept to maturity? or can they be disposed of early.
also how often is the interest paid?
Is the rate quoted per year or amount payable upon maturity?
Thanks for any help guys.
Because they'd be cheaper to buy.
They trade just like shares, and their price is determined by the market.
Annually.
The rate is quoted per year, but what you get is a percentage not of what you paid for them, but of face value. The face value is what you get at maturity, not necessarily what you pay for them when they're traded. Even when they're first issued, they don't sell for face value, but are auctioned off so the market finds its own price.
So, for example, £100 of 13% 2008 stock will pay you £13 each year and £100 in 2008. and £100 of 5% 2008 stock will pay you £5 each year and £100 in 2008. Now, which one would you be prepared to pay more for today? OK, the answer to that one is easy, but how much?
Notice that at 2.5% inflation, £100 in 4 years' time is worth only about £90 today, so if you were to pay £90 for them and get £100 later, you'd have made no profit. But you also get the interest, worth perhaps £19 for the 5% and £50 for the 13%, so the neutral value would be £109 for the 5% and £140 for the 13%. At those prices you're making no profit nor loss relative to inflation, and if you expect to see a return worth, say, 7%pa, you'd expect to pay maybe 20-25% less for them than those figures.
You'll notice that the prices of these are different, despite the fact that they're usually marketed at a "par" value of one Pound. What happens is that the Treasury takes bids on new tranches of gilts and they go at the winning bid price. Then they change price by supply and demand, just as stocks do.
So if you buy 4% gilts at 1.20, your actual yeild won't be 4% but something closer to 3% (the usual calculation of yeild isn't the price proportionate percentage though, but the average yeild to redemption (YTR) assuming that interest is reinvested in the same gilts). The YTR is usually quoted in gilts tables in the press.
They trade in markets just as stocks. You can sell through a broker and pay a fee. Alternatively, you may still be able to trade for free through a Post Office form, but trade will be at best price wen the form gets there and is processed.
Usually every six months.
The rate quoted is the percentage paid on the par value of the certificates.
FoFP
They're originally sold for £100 per block. After this, because the interest payment amount is fixed, the price fluctuates depending upon what people thing interest rates will do during the period. The % yield (interest/value) will be similar for gilts of the same duration. See
It's because they are offered at an attractive rate for the period in which they were offered. I suspect a 13% one was created when base rates were a little less than 13%.
No
Yes
Varies - Generally 6 months.
The percentage rate in the title is the yield in the issued (nominal) price generally £100
The newspapers print current and redemption yields based on the current market value.
Good questions!
Lean about clean & dirty pricing.
If you're a taxpayer, buying then within an ISA means you don't have to pay tax on the interest. Though make sure the gain isn't wiped out by the ISA or transaction charges; use someone like Comdirect or Etrade.
The DMO do an excellent guide
hth
Daytona
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