Two gilts with the same coupon are not the same gilt

Two gilts paying the same coupon can carry different clean prices and different yields, because the coupon says what they pay and the maturity says how long they pay it for.

The coupon is the one thing they share

Sorting the conventional gilts list by coupon puts gilts side by side that pay the same annual amount per £100 nominal. It is a natural first comparison, and a misleading one. The coupon fixes what the gilt pays each year, not what it costs, not how long it pays, and not what a buyer gets back for the price. Two gilts with an identical coupon can sit at very different clean prices and offer quite different yields. A reader who sorts by coupon has sorted by income, which is one of the things a gilt returns and not the measure of what it returns overall.

The figure that separates them is the maturity. A gilt three years from redemption and a gilt twenty-five years from redemption are different propositions even when they pay the same coupon: one returns the nominal value in three years, the other in twenty-five, and the market prices that difference every day.

Why maturity moves the price

The price of a gilt is the present value of everything it still has to pay, discounted at the yield the market requires. For a fixed coupon, a longer remaining life means more payments discounted, and a distant repayment of £100 that is worth less in present-value terms. When the market's required yield is above the coupon, a longer gilt has to be priced further below par to reach that yield; when the yield is below the coupon, a longer gilt is worth more above par.

The curve is rarely flat, so the market's required yield also changes with maturity. A gilt three years out is priced off the short end and a gilt twenty-five years out off the long end, and the two ends need not offer the same yield. The result is that two gilts with the same coupon can differ twice over: in the number of years of payments being discounted, and in the yield those payments are discounted at. A flat curve would leave only the first difference; in practice both are at work, and the longer gilt carries both.

The pair worked through

The table prices two gilts with the same 4.00% coupon on the semi-annual convention, one three years from maturity and one twenty-five. The yields are illustrative inputs chosen to show the mechanism, and the prices follow from them; none of the figures is a quote from any gilt.

Same coupon, same £100 repaid at maturity, and a clean price more than £12 apart. The short gilt is worth nearly par because its 4.00% coupon is close to the yield the market wants for three years; the long gilt is worth far less than par because a 4.00% coupon for twenty-five years is not enough at 4.90%, and the price has to fall until the coupon plus the pull to par adds up to that yield.

Neither price is a bargain or a warning. Each is what the market pays for that stream of payments at that maturity, and the two yields are the comparison that holds the maturity in view.

The income is the same, the return is not

On £1,000 nominal both gilts pay £40.00 a year, so a reader comparing income alone would call them identical. The redemption yield tells a different story. The short gilt returns its coupon and a small pull up to par over three years; the long gilt returns the same coupon but has to climb from about 87 to 100 over twenty-five years to deliver its yield, and the timing of that climb is long.

• The coupon is the same on both rows, so it cannot be the basis for choosing between them.
• The clean price shows what the market asks for each stream of payments at that date.
• The redemption yield folds the coupon, the price and the repayment into one comparable figure.
• The modified duration shows how much more the longer gilt's price will move for the same change in yield.

Same coupon, different sensitivity

A ten basis point rise in the semi-annual yield takes the illustrative short gilt from about 99.16 to about 98.89, a fall of roughly 28p per £100 nominal. The same rise takes the long gilt from about 87.11 to about 85.82, a fall of about £1.29. The short gilt moved by 0.28% of its price; the long gilt by about 1.48%. Both are the duration at work: about 2.7 years against about 14.6.

That is why a coupon-matched pair is a poor comparison for risk as well as for return. The two gilts share an income but not a horizon, and the longer one carries several times the price sensitivity of the shorter. The gilt yield curve is where that difference is visible as a whole: it plots each gilt against its fitted benchmark, so two gilts with the same coupon sit at their own maturities and can be read against the yield available at each.

Background, not advice

This article explains why two gilts with the same coupon can differ in price and yield; it is general background, not investment, tax or legal advice for any reader's circumstances. The figures above are illustrative and every input is stated, and the exact price, yield and duration for a gilt come from the site's own calculation against the day's report. The Debt Management Office and the day's market data are the primary sources for a real coupon, maturity, price or yield.