Government Gilts

Question 1

Auctions

Answer 1

Gilts are auctioned (offered for sale) on regular dates by DMO.

Competitive auction
Competitive bids must be for one amount at one price and bonds are sold to those whose competitive bids are at or above the lowest price the DMO is prepared to accept.
The result is that not all gilts are sold at the same price.

Non-competitive bids
Successful non-competitive bids are accepted in full at the weighted average price at which competitive bids have been accepted.

Syndicated offerings
This is where the DMO appoints a group of banks to manage the sale of the gilt on its behalf

Question 2

TAPs

Answer 2

In a TAP the DMO passes the gilts onto GEMMs who issue them directly into the secondary market; initially the gilts are still issued to GEMMs, who tender prices to the DMO.

Question 3

Time until Redemption

Answer 3

DMO
Shorts <7 years to redemption, Medium 7-15 and Long >15

Financial Press
Shorts <5 years to redemption, Medium 5-15 and Long>15

Question 4

Index Linked

Answer 4

Index-linked bonds have coupons AND redemption values which are linked to the UK Retail Price Index (RPI) or CPI – depending on the index being used or being issued by HM Government

Question 5

Break-even Inflation Rate

Answer 5

The break-even inflation rate is the rate of inflation that gives the same real net redemption yield for an index-linked gilt and a comparison conventional gilt of similar maturity for investors
of a given tax rate (ie. BRT, HRT or ART).

ABOVE the break-even rate the index-linked gilt gives the better return.
BELOW the break-even rate the conventional gilt provides the better return.

Question 6

STRIPS

Answer 6

STRIPS stands for ‘Separate Trading of Registered Interest and Principal of Securities’.
These gilts can be stripped into their coupons and final redemption amount, both traded separately. These individual parts are both registered securities. Each strip forms the equivalent of a zero-coupon bond. It will trade at a discount to its face value, with the size of the discount being determined by prevailing interest rates and time.

Question 7

Government Bond Markets in the UK

Answer 7

*Gilts issued through the Treasury by DMO (including repo market)
*Sterling loans to foreign borrowers
*Eurobond market which deals with foreign currency loans to UK and foreign governments and companies, this allows institutions who receive earnings in foreign currencies to keep the income in that currency.

Question 8

Repo Market

Answer 8

A repurchase agreement (also known as a repo or sale and repurchase agreement) allows a borrower to use a financial security (gilt) as collateral for a cash loan at a fixed rate of
interest.

A repo contract is where the borrower (in the gilt market this would be DMO), agrees immediately (part of the same contact) to sell the security (gilt) to a lender and also agrees to buy the same security from the same lender at a fixed price at some later
date.

Question 9

Repo Rate

Answer 9

The difference between the amount paid for the gilt to the borrower at the repo start date and and the amount the borrower pays back to the lender and the repo end date.
The repo rate is an important indicator of financial well-being in the markets.