Gilts and bonds

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8. Capital gains on gilts and bonds

We've seen how the price of a bond affects yield, but it also affects your capital gains position. To see why this is so, imagine three scenarios:

1. You buy a new issue of bonds at their nominal price (say, £100) and hold them until maturity. On the redemption date, you are repaid £100. Capital gain/loss: zero.
2. You buy the same bonds in the secondary market for £85 and hold them to maturity at which point you receive £100. Capital gain: £15.
3. You buy the same bonds in the secondary market for £105 and sell them before maturity for £97. Capital loss: £8.

As with shares, it's perfectly possible to make a gain or loss on bonds. Even if you hold bonds to maturity, you may still make a gain if you bought them at a discount, as example 2 shows.

One of the advantages of bonds over shares is that capital gains tax does not apply to gilts and conventional bonds. So any gains you make are tax free.

1. What are bonds? 2. Different types of issuer 3. Different types of bond 4. Bonds compared to shares 5. Bonds as tradeable instruments 6. Nominal yield 7. Calculation of current yield 8. Capital gains on gilts and bonds 9. Calculating the redemption yield 10. Factors which affect bond prices 11. Are bonds for you? 12. Selecting gilts and bonds 13. How to buy gilts and bonds 14. Unit trusts and bond funds 15. Keeping track of your bond investments 16. Tax 17. Conclusion

• First Steps in Bonds
• Beating the Dow with Bonds
• Pricing Convertible Bonds