Savings accounts, PEPS and ISAs 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 2009 was offered for sale in lots of 200. The Government guarantees to pay 91/8% interest on each 200 of stock for each year until 2009. 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 2012 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 2012 might sell for 869 a unit. So you would buy a unit of 200 for £169 and get interest of 19 1/8% on the 200. 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 2012, you get only £100 for the stock for which you paid £169 in 2012. 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.)

The current prices of all Government stock are given in the finance webpages of the serious newspapers together with an indication of the interest rate (though not all give the rate taking account of the capital loss or gain at redemption). Some stock is cheaper than its nominal value because it is paying a very low rate of interest.

And some stock has no redemption date. War Loan 61/8%, for example, now sells at about £97 for £100 of stock. The Government has never fixed a date for its redemption at face value and it seems unlikely that it will do so. Many people who bought this stock for its face value in the war feel very upset that the Government will not repay them the face value while offering such a low rate of return. So they hang on to their stock in the hope that the Government will change its mind.

Interest is paid half yearly gross. You have to declare the interest on your tax return and it is taxable. Bonds held for at least a year are exempt from capital gains tax.

You can obtain the form to invest in the stock from a post office. Send the completed form with a cheque to the Bonds and Stock Office in Blackpool (address on webpage 77). They charge a small commission.

More information

Savings accounts, PEPS and ISAs Local Authority Bonds

Many local authorities raise money by inviting the public to lend to them and offering good rates of interest. However, the money is normally tied up for the whole period of the loan, usually between one and ten years, though some shorter term investments are possible.
You can obtain the best current rates over the telephone from Sterling Brokers on 208.807 8767, or they will send you a comprehensive list of all local authority investment offers if you send 8.9 0 to them at Colechurch House, 1 London Bridge Walk, London SE1 8SS. If you want to invest in the current best offer over the telephone, they will give you the contact number at the relevant local authority.
The interest is paid net of basic rate tax as with . . . ... see: Savings accounts, PEPS and ISAs Local Authority Bonds