How to read the financial pages

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16. Government bonds

Governments issue bonds when they want to borrow money. UK government bonds are called gilts, or Treasury Stock, and are regarded as one of the safest investments you can make.

They pay holders a fixed or index-linked interest twice a year ('the coupon'), have a fixed redemption value (the 'par value' - often £100) and are repayable on a fixed date.

Like shares, bonds can be traded between investors, and their price is determined by market forces. In general, if bank interest rates go up, bond prices go down. Inflation also depresses bond prices because it erodes the value of the (usually fixed) income they provide to holders.

Information on gilt prices is published in all the broadsheet newspapers every day. In the FT they appear on the Capital Markets page. The tables are divided according to whether the bonds are short-dated (up to 5 years), medium-dated (5 to 15 years), long-dated (over 15 years), and for each gilt they tell you:

• Name of the gilt
  e.g. 8.5% Treasury Stock 2005. This indicates that the coupon is 8.5% and the redemption date is 2005.
• 52 week highs and lows
  In other words, the highest and lowest prices at which the bond has traded in the last year.
• Current price
  The mid-price of the bond, half way between the buy and sell prices quoted by market makers, at the close of the previous day's trading. This can be higher or lower than the par value.
• Yield
  Also known as the flat yield or income, this is the coupon divided by the current price.
• Redemption yield
  This indicates the total return if you hold on to the stock until redemption. The difference between this and the flat yield is that it takes into account a possible capital gain that the holder of a gilt trading at, say, £87, will get if he holds it until maturity and is repaid a par value of £100. Note that capital gains on gilts are tax free.

  When bank interest rates rise, the attraction of bonds paying lower interest rates diminishes. To compensate for this, the price of those bonds usually falls, which increases their yield and makes them more attractive.

Monday's FT provides different information on bonds. It tells you the percentage change on the previous week, the total value of stock in issue for the gilt, the dates on which holders are paid interest, the most recent ex-dividend payment of interest, and the Cityline telephone number on which you can get real-time price updates.

Just as there are indices for shares, so there are indices for gilts. They come in two kinds: price indices, and yield indices. As with share indices, the purpose of bond indices is to benchmark performance and provide investors with figures against which they can measure the performance of their own bond portfolio. Bond indices are reported in the FT daily and in the Sunday newspapers.

1. What are the financial pages? 2. What to look for 3. Business news 4. Share prices in newspapers 5. Investment trust prices 6. Share prices on the internet and television 7. Commentary on share price movements 8. Anticipating company results 9. Finding company results 10. Interpreting company results 11. Takeovers and mergers 12. Indices 13. Sectors 14. Directors dealings 15. Unit trust information 16. Government bonds 17. Corporate bonds 18. Economic data - who needs it? 19. Key economic indicators 20. Conclusion

• How to Read the Financial Pages
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