You can buy gilts and bonds direct from the issuer but most are bought and sold on the market, known as the ‘secondary market’, and that means the price can rise and fall.
If a gilt or bond is valued above or below the original issue price, it will have an impact on the percentage of your return. Here’s an example:
If you buy a gilt or bond for £950 that was originally issued for £1,000 and it pays 3%, you'll receive an interest rate which is effectively higher. This is because the interest is paid on the nominal value, not the second-hand market price you paid. So, you’ll receive £30 (3% of £1,000) rather than £28.50 (3% of £950).
And, of course, if you pay more for the gilt or bond than the nominal price, you will effectively receive a lower rate of interest. So, if you pay £1,050 you will receive £30 (3% of £1,000) rather than £31.50 (3% of £1,050).
Any fluctuation on price in the secondary market will also impact on your capital gains when a gilt or bond matures. Here’s how it would work:
If you pay £950 for a gilt or bond that was issued for £1,000, you will make a capital gain of £50 when it matures, as the loan is repaid at the nominal value.
However, if you pay £1,050 for a gilt or bond that had an issue price of £1,000, you would lose out on maturity, as you're only paid back at the nominal value.
