A gilt bought below £100 is bought at a discount and one bought above it at a premium, and the clean price relative to par is exactly what the yield to redemption reconciles into a return.
Par is £100; the price is what you pay
Every gilt repays £100 per £100 nominal at maturity — that is par. The clean price is what the market charges for that £100 on the day it is bought, and it is rarely exactly £100. A price below par is a discount; a price above it is a premium. The words describe where the market price sits against the £100 that will come back, not whether the gilt is good or poor value.
Conflating the two is a common misreading. The £100 repaid at maturity is fixed; the price paid for it is not. A gilt at 95 and one at 105 both repay £100, and the difference between the price and that £100 is a real part of the return in each case.
A gilt's coupon is fixed at issue, but the return the market wants is not. If the coupon is lower than the market now demands, buyers pay less than £100 for it, so the price sits below par and the yield rises to match the market. If the coupon is higher than the market wants, the price sits above par and the yield falls. Buying below par means part of the return arrives as a capital gain to £100; buying above par means part of the return is given up as a capital loss to £100.
This is the same price-and-yield relationship that governs every fixed-coupon gilt, seen through the lens of par. The coupon stays put; the price is the variable that reconciles it to the market's required return.
The yield to redemption reconciles the two
The gross yield ties the coupon, the clean price and the £100 repayment into one number: the annualised return if the gilt is held to maturity. A discount gilt's gross yield is higher than its coupon, because the gain to par adds to it; a premium gilt's gross yield is lower, because the loss to par subtracts from it. That is why a low-coupon gilt bought at a discount can show a gross yield well above its coupon, and a high-coupon gilt bought at a premium a gross yield below its.
The clean price relative to par and the yield to redemption are therefore two views of one fact. Read the clean price alone and a low coupon looks like a poor return; read the gross yield and the pull to par is priced in.
A worked comparison
The figures below are illustrative and every input is stated; they are not quotes from any gilt. Two gilts both pay a 4.00 coupon on £100 nominal and both have five years to maturity. One is bought at 95.00, a discount; the other at 105.00, a premium.
| Gilt | Clean price | Capital to par over 5 years | Coupon a year | Rough yield |
| Discount gilt | £95.00 | Gain of £5, about £1 a year | £4.00 | About 5.3% |
| Premium gilt | £105.00 | Loss of £5, about −£1 a year | £4.00 | About 2.9% |
The rough yields add the annual coupon to the annualised pull to par and divide by the price paid: on the discount gilt about £5 a year on £95 is roughly 5.3%, and on the premium gilt about £3 a year on £105 is roughly 2.9%. The exact gross yield compounds the cash flows, but the direction is the point — the discount raises the yield and the premium lowers it.
Par is a destination, not a target
It is worth being clear that a gilt does not have to trade back to par before maturity; par is only where it ends, at redemption. A premium gilt will lose its premium as maturity approaches, and a discount gilt will gain toward par. That pull is already priced into the yield, so it is not a free gain or a hidden loss.
A reader comparing two gilts should read the yield, not the coupon alone, because two coupons can hide very different returns once the price is taken into account.
Where to read it
The conventional gilts list shows each gilt's clean price against its gross yield, so a discount or a premium is visible at a glance. The gilt's own page, opened from that list, carries a price history that shows how its clean price has moved relative to par over time, which puts a single day's premium or discount in the context of the range it has traded in.
Discount and premium are not cheap and dear
A discount does not make a gilt cheap, and a premium does not make it dear. Both words describe the clean price against the £100 that will be repaid, and both are already reflected in the yield to redemption. A gilt at 95 is not a bargain merely because it is below par; its lower price and the gain to par are exactly what lifts its yield above its coupon.
The check is always the yield, read alongside the coupon and the price together. Two gilts at 95 and 105 can offer the same yield to redemption if their coupons and maturities line up, because the market prices the pull to par into both. The premium or discount is the shape of the cash flow, not a verdict on value.
Background, not advice
This article explains what buying above or below par means and how the yield to redemption reconciles it; it is general background, not investment, tax or legal advice for any reader's circumstances. A gilt's price moves before maturity, so a premium or discount on the day it is bought is not the amount realised at redemption unless the gilt is held to maturity. The gilt's own record and the day's market data are the primary sources for real prices and yields.