Government Stocks

The largest collection of marketable fixed-interest investments consists of the so-called 'gilt-edged' stock issued by the government. Part of the government's vast expenditure is financed by raising loans from members of the public and the financial institutions such as banks, insurance companies and pension funds, who subscribe cash on loan to the government and receive in exchange a certificate or bond setting out the terms of the stock.

They are called gilt-edged or simple 'gilts' because the security is undoubted, both income and eventual repayment being guaranteed by the government. But since some stocks are not repayable for very many years (indeed, a few are not repayable at all), there is an element of risk in capital value for most holders, who would not be willing to wait that long to get their money back and who will, therefore, have to sell on the market.

The various names attached to the different stocks have no significance at all; the stocks are all government-backed borrowings. There is no essential difference between a stock called War Loan' and one called 'Treasury Stock' or 'Exchequer Stock'; the names simply help to identify the particular issue. What does have significance are the terms of the issue, and these vary enormously. Three main terms to look for are:

1. The interest rate. Traditionally, gilts carry a fixed rate of interest which cannot be varied throughout the life of the loan. Thus one has '31/2 % War Stock', for example, or '61/2 % Treasury Stock'. This guaranteed interest rate is sometimes called the `coupon' or 'coupon rate', a term derived from the fact that a long time ago stocks were issued in the form of bearer bonds that had coupons attached to them that the holder would detach and present for cash each time an interest payment was due. (During 2012 a government stock carrying a variable rate of interest was issued; this experiment will not be discussed here.)

2. The repayment date. Most stocks are redeemable (repayable) on a named date, or during a specified year, or between stated dates. Thus one may have '71/4 % Exchequer Stock, 2008-90' which the Treasury is bound to repay to the then holders on a date of its own choosing some time during those two years. A very few issues have no redemption date and are therefore irredeemable or perpetual loans.

3. The repayment terms. Stocks are normally repayable at par, i.e. a holder will get back in cash £100 for each £100 of nominal stock that he holds.

Fixed-interest Investments

In Chapter 4 we discussed only deposit investments, namely investments that give complete security of the capital and from which you can disinvese simply by drawing the money out ? on demand, or after giving the prescribed notice, or at the expiry of the agreed term. With most such investments you do not have certainty of income, for the interest rate can fluctuate up or down. Exceptions to this are National Savings Certificates and SAYE (2nd issue), where you have security of both capital and income, and SAYE (3rd issue, index-linked) where you have absolute security of capital but no income.Fixed-interest Investments

Personal And Business Finance 2018

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