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I haven't seen a thread like this on HPC and thought it might be worth trying to start. Am sure that there are many questions/points that some people are unclear on and would like to know.

Here are my two dumb questions to start with:

1. What is the difference between a gilt and a bond? They are the same right?

2. Why does the BoE base rate matter? Surely banks can charge whatever interest rate they fancy...are they in anyway forced to follow BoE rate rises or falls?

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1. What is the difference between a gilt and a bond? They are the same right?

Gilts are just the UK name for government bonds - "Gilt-edged securities".

2. Why does the BoE base rate matter? Surely banks can charge whatever interest rate they fancy...are they in anyway forced to follow BoE rate rises or falls?

It's the rate at which banks can borrow from the BoE - their cost of money.

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I haven't seen a thread like this on HPC and thought it might be worth trying to start. Am sure that there are many questions/points that some people are unclear on and would like to know.

Here are my two dumb questions to start with:

1. What is the difference between a gilt and a bond? They are the same right?

2. Why does the BoE base rate matter? Surely banks can charge whatever interest rate they fancy...are they in anyway forced to follow BoE rate rises or falls?

I will have a go.

A gilt is a type of bond, issued by the UK government.

A bond is more general than that, anyone in theory can issue bonds to borrow money, you could if you could find a buyer. But a Gilt is a bond issued by the UK government.

The BofE base rate is something that confuses me. I used to think that it was the rate at which banks, like Lloyds for example, borrowed at from the Bank of England. I tried to find out who borrowed from whom and at what terms by asking the Bank of England, and they were terribly unclear. The best I could get from them was that it was the rate that the Bank of England pays banks like Lloyds for money that Lloyds deposit in the Bank of England.

Please can someone correct me if I am wrong here.

As for the relevance of the base rate, well it is one of many rates that get charged in the marketplace. There are inter-bank lending rates charged from bank to bank, all sorts of bond rates depending on the bond issuer, mortgage rates, credit card rates, etc etc, and they all matter. The base rate is like the bottom rate, and the least risky type of lending. If you lend to the bank of England, you will get your money back, cos they can print it if all else fails. So it sets a base for the entire interest rate market.

Banks therefore will only use their money to lend to others if they see the risk reward equation as being in their interest. And for that to happen, rates of interest will be above the base. They can in theory vary a lot from the base rate, though for many years, mortgage rates were close to base rates, because mortgages were not seen as much riskier than lending to the BofE.

Banks also cannot charge what rate they like. They are restricted by the market. If they charge too high an interest rate, someone else will lend to the same borrower at a lower rate, or the borrower will walk away from the deal, just like in any other market.

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Why do people do duplicate threads? :)

Gilty as charged....my click is my bond

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I haven't seen a thread like this on HPC and thought it might be worth trying to start. Am sure that there are many questions/points that some people are unclear on and would like to know.

Here are my two dumb questions to start with:

1. What is the difference between a gilt and a bond? They are the same right?

2. Why does the BoE base rate matter? Surely banks can charge whatever interest rate they fancy...are they in anyway forced to follow BoE rate rises or falls?

Absolutely nothing wrong about asking the questions. Though it helps if you use the relevant headlines (this is not a tabloid paper forum...is it ?)

1. Already been answered.

2. Base rate is not the rate banks borrow from BoE. Base rate is the target rate that Boe wants the banks to borrow/lend to each other as well as the rate

that BoE pays on bank's deposit at BoE. BoE will lend to the commerical banks at a rate very close to base rate during sterling framework operatin (same

as US open market operation) whenever it feels the banks 'need' money and that interbank rates are moving away from the target rates. Through this,

BoE influence the rates banks charge each other. (Imagine if the banks are dairy farmer selling milk to each other and you have a giant farm down

the road who promises to provide unlimited amount of milk until mlik prices fall within the 'target' range)...

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Absolutely nothing wrong about asking the questions. Though it helps if you use the relevant headlines (this is not a tabloid paper forum...is it ?)

1. Already been answered.

2. Base rate is not the rate banks borrow from BoE. Base rate is the target rate that Boe wants the banks to borrow/lend to each other as well as the rate

that BoE pays on bank's deposit at BoE. BoE will lend to the commerical banks at a rate very close to base rate during sterling framework operatin (same

as US open market operation) whenever it feels the banks 'need' money and that interbank rates are moving away from the target rates. Through this,

BoE influence the rates banks charge each other. (Imagine if the banks are dairy farmer selling milk to each other and you have a giant farm down

the road who promises to provide unlimited amount of milk until mlik prices fall within the 'target' range)...

easybetman,

why do commercial banks offer to pay say 3% interest, when they can borrow from the Bank of England at 0.5%?

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Why do male to female transexuals in California end up looking like bikini beach babes... but male to female transexuals in the UK end up looking like lorry drivers who have stopped at one too many greasey spoons?

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Why when i sell a share does it continue to rise for weeks after i've sold?

I've picked the bottom in a share price cycle loads of times but never once have i hit a top. How do i teach myself to have more patience?

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Why do male to female transexuals in California end up looking like bikini beach babes... but male to female transexuals in the UK end up looking like lorry drivers who have stopped at one too many greasey spoons?

Why do females in California end up looking like bikini beach babes... but females in the UK end up looking like lorry drivers who have stopped at one too many greasey spoons?

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easybetman,

why do commercial banks offer to pay say 3% interest, when they can borrow from the Bank of England at 0.5%?

Because:

(1) They can lure you in and flog you lots of other products or charge you fees

(2) Borrowing from BoE requires collateral which are normally needs to be AAA rated.

(3) It looks bad on them to borrow from BoE emergency window.

(4) Your deposit then becomes the bank's bank credit and the bank can lend this credit to another punter at higher rates. Personal loan

rates is about 9% right now, 3% is peanuts.

(5) Banks will reduce you account rate to 0% after a few years when you forget about your account..

Edited by easybetman

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Because:

(a) They can lure you in and flog you lots of other products or charge you fees

(B) Borrowing from BoE requires collateral which are normally needs to be AAA rated.

© It looks bad on them to borrow from BoE emergency window.

(d) Your deposit then becomes the bank's bank credit and the bank can lend this credit to another punter at higher rates. Personal loan

rates is about 9% right now, 3% is peanuts.

easybetman,

with gilts around 3.5% for the ten year, what is to stop a bank just borrowing loads from the BofE at 0.5%, and just buying loads of 10year gilts? The more they buy, the more collateral they can obtain. I havent been able to work this one out.

All that stuff about it being bad to borrow from the Bank of England too, it wouldnt bother the markets if you were doing it as an arbitrage play.

So why dont banks just borrow to the hilt from the BofE at 0.5% ? Sounds like easy money. There must be something that stops that happening.

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easybetman,

with gilts around 3.5% for the ten year, what is to stop a bank just borrowing loads from the BofE at 0.5%, and just buying loads of 10year gilts? The more they buy, the more collateral they can obtain. I havent been able to work this one out.

All that stuff about it being bad to borrow from the Bank of England too, it wouldnt bother the markets if you were doing it as an arbitrage play.

So why dont banks just borrow to the hilt from the BofE at 0.5% ? Sounds like easy money. There must be something that stops that happening.

1. They are doing that already. British banks are stuffed full of Gilts, and so are Eurozones banks with eurozones governemt bond (and hence all these bail out or belly up)

2. Borrowing from BoE at bank's own initiative (as opposed to via auction) via discount window carries a cost of base + 1% (=1.5%) and involve a stigma.

So, better borrow from other banks at 0.7% or so.

3. Also, remember these are short term rates. So if base rates go up beyond 3.5%, the funding cost > interest income and they start losing money for

tge whatever years left in the 10 years gilt. Leverage that lost up to 20x or so and it will be disaster. But if it is only short term bonus at stake, then

I am sure there is lots of temptation to do that (if not already done).

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Why do females in California end up looking like bikini beach babes... but females in the UK end up looking like lorry drivers who have stopped at one too many greasey spoons?

At last one I can answer. They have actually stopped at too many greasy spoons.

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Thanks for the responses so far!

3. US treasuries are the equivalent of UK gilts, right?

Depending what do you mean by equivalent, but generally yes, Treasuries are US government 'bond' and Gilts are UK government 'bond'.

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  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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