A gilt is a bond issued by the UK government to borrow money from investors. The government uses the proceeds to fund public spending and repays the debt over time.
A gilt usually pays regular interest, called a coupon, until it matures, and at maturity the UK government repays the principal, or face value, to the holder. Gilts come in two main forms: conventional gilts pay a fixed coupon, while index-linked gilts adjust their payments in line with inflation.
A gilt is the UK's version of a government bond, the role US Treasuries play in America or Bunds play in Germany. Gilts are treated as low-default-risk because the UK government backs them, but their market prices still move with interest rates, inflation expectations, and demand for government debt.
You buy a 10-year conventional gilt with a face value of GBP 10,000 and a fixed annual coupon of 4%.
The yearly interest is:
GBP 10,000 √ó 4% = GBP 400
You receive GBP 400 a year, and when the gilt matures after 10 years, the UK government repays the GBP 10,000 principal.