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One important outcome of this process was the emergence of consols, perpetual bonds that paid a fixed coupon with no fixed redemption date.<ref>{{Cite book |last=Dale |first=Richard |url=https://books.google.com/books?id=z7xLh00p9yAC |title=The First Crash: Lessons from the South Sea Bubble |date=2004 |publisher=Princeton University Press |isbn=978-0-691-11971-7 |page=24 |language=en |lccn=2004044319 |quote=Perpetual annuities in the form of today’s undated gilt-edge securities were not issued until after the Bubble.}}</ref>

One important outcome of this process was the emergence of consols, perpetual bonds that paid a fixed coupon with no fixed redemption date.<ref>{{Cite book |last=Dale |first=Richard |url=https://books.google.com/books?id=z7xLh00p9yAC |title=The First Crash: Lessons from the South Sea Bubble |date=2004 |publisher=Princeton University Press |isbn=978-0-691-11971-7 |page=24 |language=en |lccn=2004044319 |quote=Perpetual annuities in the form of today’s undated gilt-edge securities were not issued until after the Bubble.}}</ref>

4% Consols.<ref>{{Cite web |last=Wilson |first=Simon |date=2014-11-10 |title=Why Britain is repaying its war debt |url=https://moneyweek.com/355224/repaying-our-war-debt |access-date=2025-12-07 |website=MoneyWeek |language=en |quote=The war debt that the Treasury is retiring’ (or calling’) on 1 February 2015 is £218m of undated perpetual bonds paying 4% a year, known as the 4% Consolidated Loan (or Consols’).}}</ref>

Latest revision as of 03:45, 7 December 2025

Inverse relationship

[edit]

The relationship between gilt prices and interest rates is an inverse one.[1] When gilt prices fall, the yield will be higher. Conversely, when gilt prices rise, the yield will fall.[2] The inverse relationship is non-linear, often represented by an outwardly bowed curve,[3] and the inverse effect is not proportional.[4][5] Due to the coupon rate remaining constant for conventional gilts, the price has to adapt in the secondary market in order to reflect the prevailing market conditions and to remain competitive in relation to new debt.[6] Undated gilts are particularly sensitive to fluctuations in interest rates.[4]

Other areas requiring references

[edit]

The Bank of England’s debt securities were issued as certificates with gilded edges.[7]

Undated Gilts[8][9]

Conventional gilts:[10]

Index-linked gilts:[11]

Consols:[12]

Repayment of 8 undated gilts:[13]

Nomenclature: Commonwealth nations. South Africa[14] and India.”[15]

Indexation lag:[16]

In the secondary market, conventional gilts may trade at a premium or discount to their nominal value:

When market interest rates fall below the coupon rate, the price of an existing gilt tends to rise above par:

Green Gilts:[17]

UK’s move from undated to dated gilts, culminating in the redemption of all remaining undated gilts in 2015:[18]

The coupon is expressed as an annual percentage of the gilt’s nominal value, which is typically £100.[19][20]

8-month lag (Index-Linked Gilts):[21]

3-month lag:[22]

£218 million repayment.[23]

The South Sea Bubble Crash of 1720.[24]

One important outcome of this process was the emergence of consols, perpetual bonds that paid a fixed coupon with no fixed redemption date.[25]

4% Consols.[26]

  1. ^ Evans, Anthony J. (2014-10-27). Markets for Managers: A Managerial Economics Primer. John Wiley & Sons. p. 103. ISBN 978-1-118-86796-9. LCCN 2014022437. There is an inverse relationship between interest rates and the price of gilts.
  2. ^ Stevenson, David (2012-09-26). The Financial Times Guide to Investing for Income: Grow Your Income Through Smarter Investing. Pearson UK. p. (unpaginated). ISBN 978-0-273-77638-3. LCCN 2011009437. Equally, as interest rates rise, investors all other things being equal will find this fixed income stream less attractive and as a consequence the market price of that bond will fall.
  3. ^ Fabozzi, Frank J.; Pollack, Irving M. (1983). The Handbook of Fixed Income Securities. Dow Jones-Irwin. p. 599. ISBN 978-0-87094-306-5. LCCN 82071874. The slight curvature in Exhibits 3 and 4 results from the nonlinear relationship between price and yield.
  4. ^ a b Redhead, Keith (2008-09-15). Personal Finance and Investments: A Behavioural Finance Perspective. Routledge. p. (unpaginated). ISBN 978-1-134-08837-9. Gilt prices vary because interest rates vary. A relatively high sensitivity to interest rate movements is observed amongst undated gilts …There is always an inverse relationship between interest rates and gilt prices but rarely a proportionally inverse one. Usually the change in gilt price is less than proportionate to the interest rate change.
  5. ^ Johnson, R. Stafford (2009-02-09). Bond Evaluation, Selection, and Management. John Wiley & Sons. p. 24. ISBN 978-1-4051-4235-9. LCCN 2003015468. Thus, the inverse relationship between bond prices and yields is non-linear.
  6. ^ Arnold, Glen (2015-07-15). The Financial Times Guide to Bond and Money Markets. Pearson UK. p. 56. ISBN 978-0-273-79180-5. Some conventional gilts, following issuance by the government and trading on the secondary market, can be stripped. A gilt STRIPS (the letters stand for Separate Trading of Registered Interest and Principal Securities) occurs when the gilt is separated from its coupons and the gilt and its coupons all become zero coupon bonds.
  7. ^ Russell, Chris (2006-07-11). Trustee Investment Strategy for Endowments and Foundations. John Wiley & Sons. p. 191. ISBN 978-0-470-03222-0. Gilt – a UK Government bond so called because traditionally the bond certificate had gilt edges, hence: gilt-edged now a generic term assigned to an investment with extremely low risk and high security.
  8. ^ OECD (2017-05-26). OECD Sovereign Borrowing Outlook 2017. OECD Publishing. p. 29. ISBN 978-92-64-27127-2. The history of ultra-long bonds goes back to the 18th Century when the United Kingdom borrowed through issuance of “undated” gilts. More than two centuries later, the last undated bonds in the United Kingdom gilt portfolio were completely redeemed, in 2015.
  9. ^ Taylor, Bryan (February 2016). “The Perpetuities that are No Longer Perpetual – Finaeon”. Retrieved 2025-12-01. The last undated gilt, also referred to as a perpetuity because it had no redemption date, was called in by the British government on July 5, 2015. Three hundred years of financial history has come to an end.
  10. ^ Chisholm, Andrew M. (2009-06-29). An Introduction to International Capital Markets: Products, Strategies, Participants. John Wiley & Sons. p. 79. ISBN 978-0-470-75898-4. LCCN 2009013327. UK government bonds are called gilts. Like US Treasury bonds, conventional gilts pay semi-annual coupons and redeem at par at maturity.
  11. ^ Bruce, Ian (2009). Understand Bonds and Gilts in a Day. Global Professional Publishing. p. 26. ISBN 978-1-906403-10-2. LCCN 2010292292. Index-linked gilts are dated gilts which are designed to guard against erosion caused by inflation. They are tied to inflation through the Retail Price Index.
  12. ^ Manos, Ronny; Parker, Keith; Myddelton, D. R. (2023-05-01). Corporate Finance for Business: The Essential Concepts. Springer Nature. p. 124. ISBN 978-3-030-92419-5. These undated gilts were referred to as consols and promised to pay a stated coupon rate each year for ever … Indeed, although some of these perpetuities had been in issue for more than one hundred years, all of them were fully redeemed by 2015, following a decision by the Chancellor of the Exchequer.
  13. ^ Pagdin, Ian; Hardy, Michelle (2017-11-03). Investment and Portfolio Management: A Practical Introduction. Kogan Page Publishers. p. 190. ISBN 978-0-7494-8006-6. LCCN 2017470228. In 2014, the government undertook to repay the last eight outstanding undated gilts, some of the oldest UK government borrowing in existence. Repayment was achieved by 5 July 2015…
  14. ^ The South African Financial System. Southern Book Publishers. 1995. p. 141. ISBN 978-1-86812-602-6. LCCN 95207211. Public sector fixed-interest securities are known as “gilt-edged” securities (or “gilts”) when they refer to government stock, …
  15. ^ Thomas, Tholoor Mathew (2024-03-21). “3”. Handbook of Jargons for Banking and Investments: An Essential Handbook for Finance Professionals. Notion Press. p. (unpaginated). ISBN 979-8-89277-893-0. Government bonds in the U.K., India, and several other Commonwealth countries are known as gilts.
  16. ^ Hördahl, Peter; Tristani, Oreste (2007). Inflation Risk Premia in the Term Structure of Interest Rates. Bank for International Settlements, Monetary and Economic Department. p. 7. …indexation lag (the fact that there exists a lag between the publication of the inflation index and the indexation of the bond)…
  17. ^ Tirumala, Raghu Dharmapuri; Tiwari, Piyush (2023-03-18). Advances in Infrastructure Finance. Springer Nature. p. 85. ISBN 978-981-99-0440-2. Green bonds fall under the category of fixed income instruments whose proceeds will be used to finance climate or environment friendly projects.
  18. ^ “Repayment of £2.6 billion historical debt to be completed by government”. GOV.UK. 27 March 2015. Retrieved 2025-12-05.
  19. ^ Jones, Holly (2022-09-30). “All About Gilts”. Middleton Private Capital. Retrieved 2025-12-05. A bond will be issued at a par value, normally £100 and pay a fixed interest for a fixed period.
  20. ^ Cattlin, Rebecca (4 October 2022). “What are UK gilts and how do you trade them?”. forex.com. Retrieved 5 December 2025. Over the lifetime of the loan, the investor receives interest payments, known as the coupon. This is expressed as a percentage of the gilt’s face value.
  21. ^ Brynjolfsson, John; Fabozzi, Frank J. (1999-02-15). Handbook of Inflation Indexed Bonds. John Wiley & Sons. p. 242. ISBN 978-1-883249-48-9. The structure of inflation-linked bonds in Britain is quite different than that of the United States, Canada, or Sweden. The U.K. issues incorporate an 8-month lag, significantly longer than that of the U.S. issues.
  22. ^ “Formulae for Calculating Gilt Prices from Yields” (PDF). londonstockexchange.com (3rd ed.). Debt Management Office. 16 March 2005. p. 32. Retrieved 5 December 2025. Index-linked gilts first issued from April 2005 employ the three-month lag indexation technique first used in the Canadian Real Return Bond (RRB) market, rather than the eight-month lag methodology previously used.
  23. ^ Kollewe, Julia (2014-10-31). “Paying the price of war: Britain makes good on historic debts”. The Guardian. ISSN 0261-3077. Retrieved 2025-12-07. It announced on Friday it would pay off £218m from a 4% consolidated loan on 1 February 2015, as part of a redemption of bonds stretching as far back as the 18th century.
  24. ^ “The South Sea Bubble, 1720”. harvard.edu. Retrieved 7 December 2025 – via Harvard Library. The toll of the South Sea Bubble prompted a reckoning of the root causes of the crash and calls for restructuring the national debt.
  25. ^ Dale, Richard (2004). The First Crash: Lessons from the South Sea Bubble. Princeton University Press. p. 24. ISBN 978-0-691-11971-7. LCCN 2004044319. Perpetual annuities in the form of today’s undated gilt-edge securities were not issued until after the Bubble.
  26. ^ Wilson, Simon (2014-11-10). “Why Britain is repaying its war debt”. MoneyWeek. Retrieved 2025-12-07. The war debt that the Treasury is retiring’ (or calling’) on 1 February 2015 is £218m of undated perpetual bonds paying 4% a year, known as the 4% Consolidated Loan (or Consols’).

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