Glossary: Fixed income investments
Financial securities that generate a fixed amount of income that does not vary over the life of the investment. They are generically referred to as bonds but are known as gilts in the UK. They are issued by the government, public companies and local authorities to raise money and sell off debt in the shape of a bond that promises to pay the holder a fixed rate of interest (the coupon) on a specified date for a specified period (although some bonds can be undated). Bond prices fluctuate on the market and the level of fixed interest the bond provides determines the price. The higher the price paid for a bond, the less interest it yields. For example, if a bond is issued at £100 (known as “par”) and pays a 10% coupon in an economic environment where base rate is 5%, the 10% coupon looks attractive, so sellers move in on a fixed supply and prices double to £200 (the bond is trading “over par”), so the bond is still paying 10% of its original £100 face value as a coupon but because it was bought for £200, it now yields 5%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.