Bond dilemma 007

bowlhead99 wrote: »

You are not going to get 'risk information' on a stockbroker's site, because as you note, it's not a fund. It represents money lent to a banking institution. If the bank goes completely under, which hopefully won't happen, they won't be able to pay off all the bondholders. As a holder of that bond you would get paid before a holder of the equity (ordinary shares) in BOI, but their debt to you is subordinated to other creditors so there may not be anything in the pot for them to pay you with. Meaning that theoretically you could lose all your investment.

You can see what some of the global credit ratings agencies think of BOI and a little bit about the wider Irish banking industry at https://investorrelations.bankofireland.com/debt-investors/credit-ratings/. Ratings agencies get things wrong sometimes of course.

At the moment, based on interest rates and their credit rating, the yield on the bond is about 5.75% a year. That comes from the headline interest rate of 13.375% on each £100 facevalue of bonds, combined with the fact that each bond would be worth £230ish if you sold them today, so really you are getting £13.375 annually on each £230ish of holding.

Obviously that's much higher than the interest rate you would get if you put money in a Bank of Ireland bank account protected by a financial services compensation scheme, or indeed in a savings account with any reliable bank. And it's more income per year than you would get as dividends from pretty much any big blue-chip company whose shares you could buy in the European stock markets. Investors in the market recognise it's pretty risky to hold the bonds rather than put the money somewhere risk-free, so that's why you're able to get that rate of close to 6% on them.

If BOI's profitability, financial strength and credit rating is improved so they are perceived as safer, investors will be willing to accept a lower effective interest rate, e.g. £13.375 a year having paid perhaps £250 for the bond instead of £232, is a running yield of 5.35% instead of 5.75%. So maybe you will make a profit on the price going up, as it has done over the last 6 months. Or maybe their financial strength won't change and market interest rates won't change so will just make profit by collecting the £13.375 a year while the price steadfastly remains at £232.

What could happen instead of course is that interest rates for pounds sterling in risk free savings and deposits continue to tick up over time, and Bank of Ireland's financial strength declines, and rival bond-issuers' financial strength improves, relatively, so much so that people demand a running yield of 13.375% on their purchase cost if they buy those BOI perp sub bonds. Which means they would only pay £100 to buy a bond with £100 of face value paying £13.375 a year of interest. Only getting back £100 from your £230 purchase might be something you would see as quite a disaster. Of course, if they remain solvent and don't default (and it doesn't seem they are likely to default any time soon), you would at least be collecting the £13.375 year in year out, so you might recoup your £230 that way.

So, you could quite easily keep holding the bonds and collecting the £13.375 per £100 of face value (£232 of market value) and make a comfortable profit over time. Or you might end up giving up and selling at a loss. Who knows? But generally you can't expect Hargreaves Lansdown or anyone else to give you an accurate opinion. Among other things, they don't know how you would react to a change in the market price of the bonds. Would you sell out in a crash and crystallise your heavy losses? Would you hold on for a total loss? Would you grab a profit and sell out at the very first opportunity and not actually stick around to collect any interest payments at all? Do you have capacity in your personal allowances or ISA to receive the interest tax free, or are you in a situation where you'd pay 40% tax on £80 of interest income but don't save any tax at all if you sell out and take an £80 capital loss - skewing the risk for you?

There are too many potential scenarios and opinions to give you good 'advice' on what to do with your holding other than to make the generalisation comment that few people would decide to invest substantial amounts of money into PIBS issued by one individual company unless they already had a broad portfolio. Instead they would use investment funds with a broad portfolio of holdings.

Maybe you already have a great set of investment funds and this is just a bit of fun money. But you mentioned you bought them last month when not very savvy and presumably you are on here because you're now more savvy and don't think they are the sort of thing you should be holding. If that's the case, there is no shame in selling them for £80 loss or even £180 loss or £580 loss. A loss of [less than all of your money] is better than just holding something you don't want for a long time and hoping it all turns out wonderfully with no confidence that it actually will.