A gilt and a corporate bond on one cash-flow basis

A gilt and a corporate bond both pay a fixed coupon and repay a nominal, so putting them on one cash-flow basis shows the yield gap between government and company borrowing.

Two bonds, one shape

At first glance a gilt and a corporate bond look like the same thing from different borrowers. Both pay a coupon at set intervals, both repay a nominal at maturity, and both trade at a price that moves with the market. That similarity is real, and it is what makes a like-for-like comparison possible: if the cash flows have the same shape, the yields can be read against each other. What differs is who is borrowing and what a buyer is paid for taking the extra risk of one over the other.

Putting them on one cash-flow basis — the same coupon structure, the same discounting, the same repayment — turns the comparison into a single number: the yield gap. The gap is what a corporate bond offers over a gilt of comparable maturity, and it is the market's price for the difference between the two borrowers.

What the two share

The mechanics a reader already knows from gilts carry across almost unchanged. A corporate bond has a coupon, a clean price, an accrued interest and a dirty price. It has a yield that moves opposite to its price. It repays a nominal at maturity. Because the shape is the same, the same yield calculation applies to both, which is what lets the site place a gilt and a corporate bond on one basis and compare them directly.

What differs between them

The differences are not in the shape of the cash flows but in what stands behind them. A gilt carries the credit of the UK government. A corporate bond carries the credit of the company that issued it, and a company can run into difficulty in a way a government is far less likely to. To compensate a buyer for that possibility, a corporate bond generally offers a higher yield than a gilt of similar maturity — the yield gap. The gap is not free money; it is the market's price for the extra credit risk.

A second difference is liquidity. Gilts form a large, actively traded market, so a holding can usually be bought or sold without moving the price much. A corporate bond may trade far less often, so its price can be harder to establish and a buyer or seller may face a wider spread. That is part of why the gap exists alongside credit: a buyer is paid for accepting a less liquid instrument.

Tax treatment can differ too. Interest from corporate bonds and interest from gilts are both income, but the way capital gains are treated can vary between them, and a reader's own position decides what that means. The site does not resolve that here; it is a reason the two are not interchangeable even when the yields look comparable.

Measuring the gap on one basis

To compare the two honestly, both yields need to be computed the same way. The site's gross yield — the yield held to maturity with coupons reinvested at the same rate, compounded once a year — gives one consistent basis, so a gilt's gross yield can be set against a corporate bond's on the same terms. The gap between them is then the extra return the corporate bond offers for its additional credit and liquidity risk, expressed as a yield difference rather than a price difference.

The comparison only holds at a similar maturity. A short gilt and a long corporate bond are not measuring the same thing, because the yield a bond offers depends heavily on how long the money is lent for. A reader comparing the two should match the maturities first, then read the gap. The gap at one point on the curve says little about the gap at another.

The gap is not constant over time, either. It tends to widen when buyers are more concerned about company credit and to narrow when they are less so, so it moves with the market's appetite for risk rather than with anything written into either bond's terms. A reader comparing the two on one day is reading the market's pricing on that day; the same comparison on another can show a different gap without any change to the coupons, the maturities or the issuers.

Reading them on the site

The conventional gilts list carries the coupon and gross yield for each gilt, which is the gilt side of the comparison. The yield-curve page places each priced gilt against its fitted benchmark by maturity, so a reader can find the gilt yield at the tenor that matches a corporate bond of interest. Setting the two yields side by side on one basis is what makes the gap visible.

The gap is a description of the market's pricing, not a recommendation. A wider gap means the corporate bond is offering more over the gilt; whether that extra return is worth the extra credit and liquidity risk is a judgement about the reader's own circumstances, which is exactly the kind of judgement the site does not make for them.

Background, not advice

This article explains how a gilt and a corporate bond can be compared on one cash-flow basis; it is general background, not investment, tax or legal advice for any reader's circumstances. A corporate bond carries credit risk a gilt does not, and both can lose value before maturity as prices move. Real yields and coupon terms come from each bond's own record and the day's market data, which are the primary sources.