Financial Products Series: Treasury Bills

The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the ninth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

1. Shares
2. Structured Products
3. Cash
4. Current Accounts
5. Savings Accounts
6. Annuities
7. Certificate of deposit
8. Options
9. Treasury Bills
10. Bonds
11. Tracker funds
12. Credit

If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Treasury Bills (or Gilts in the UK)

Picture from freedigitalphotos.net

Many governments need to borrow money to service debt requirements. A treasury bill or gilt is the type of bond that is issued to allow the government to do this. Today the government has an outstanding stock of gilts measuring well over £1,000 billion.

Gilts in the UK are considered the safest type of investments. The UK government has never defaulted in its debts in all its existence (apart from once in 1672 but don't tell anyone!). As a reward for that standard of borrowing the UK government has a AAA credit rating, as issued by the credit rating agencies (that is the highest you can get!). As a mark of the UK government's creditworthiness, some investors are willing to purchase 50 year gilts; such is the confidence in the UK government's ability to honour their debts (we can all learn from such creditworthiness!). The typical maturity of UK gilts is roughly 14 years.

How do Gilts Work?

Gilts are bought when issued for the nominal amount and is held until a specified redemption rate (up to 50 years later in most cases). Interest is paid every year, twice a year, plus you will receive the nominal amount originally invested at the end of the term. Currently interest rates are between 0.5% up to 3% ranging from a 1 year gilt to a 30 year gilt. As you can see, the government has an incentive to inflate away debt. Thus the fact that people still invest demonstrate's investors trust that the UK Government will try to control inflation. Gilts are bought through brokers or indirectly though funds.

Advantage

• No capital loss
• Extremely secure - the UK government has never defaulted
• You can utilize ISAs
• Potential to index link the bonds

Disadvantages

• The income from gilt interest payments is taxable
• Inflation erodes over time
• Not accessible until the term is completed
• Higher rates of interest can be found elsewhere

Overall conclusion

Gilts are a very safe secure investment. It is surprising that more of us in the UK don't buy gilts. Maybe it is because the rate on gilts are so low at the moment due to the extreme creditworthiness and popularity of the gilts with big investors and funds.

Score: 8

Advice: A portion of your investments should be in a creditworthy governments treasury bills. They are safe and secure investments. Be sure to utilize your ISAs.

Readers, what proportion of your wealth do you think should be in gilts?

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