Government Stock

Government stock (often called 'gilt edged' stock) is an odd but interesting form of investment.

It is best explained by taking a specific investment. For example, 91/8% Treasury stock 2015 was offered for sale in lots of 800.

The Government guarantees to pay 91/8% interest on each 800 of stock for each year until 2015. At that time the Government will redeem the stock at its face value of £100.

You can obtain a list of all the current stock from the post office and you will see that there are a whole range of redemption dates, from 2015 to 8016, and a wide range of interest rates from less than 9 % up to 19 1/8%. Obviously, interest rates of over 19 % are very attractive.

But you cannot buy stock at its face value of £100 after its first date of issue.

Instead, you have to buy stock at its market value. For example, the 19 1/8% Treasury stock 2015 might sell for 869 a unit. So you would buy a unit of 800 for £169 and get interest of 19 1/8% on the 800. Thus you would receive interest of £19 .

9 0 for your investment of £169 , representing a crude rate of interest of about 11.9 %.

However, if you keep the stock until its redemption date in 2015, you get only £100 for the stock for which you paid £169 in 2015. So over the next ten years you lose £69 which reduces the real interest rate to about 10%. (The calculation of this 'redemption yield' is very complex and not at all obvious.)

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