5. Gilts may trade in the market at above or below face value. As noted above, the coupon rate is often fixed. If prevailing interest rates are the same as the coupon payable on the Gilt, the Gilt should trade at its face value (known as "par" value). If prevailing rates are higher, the Gilt will tend to trade at below par and vice versa. This enables a purchaser of a Gilt with a non current coupon to invest with the immediate expectation that he can earn the prevailing rate of interest on this particular security. Bonds trade on a similar basis, the price reflecting the expected prevailing return for a bond with particular risks.
6. The rate of return an investor earns on a Gilt or bond, which takes into account the price the investor pays, the gross coupons payable, its maturity and the redemption amount is known as the gross redemption yield. The price of the Gilt or bond is a function of the gross redemption yield. It is the sum of the present value of all the future cashflows, discounted at the gross redemption yield. Therefore, when the gross redemption yield goes up, the price goes down and vice versa.