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    • sixpence.
    • By sixpence. 11th Jan 18, 1:28 AM
    • 58Posts
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    sixpence.
    Bond dilemma 007
    • #1
    • 11th Jan 18, 1:28 AM
    Bond dilemma 007 11th Jan 18 at 1:28 AM
    Excuse the James Bond reference in the title. I couldn't help myself.

    In December 2017, when I was mildly younger and considerably more ignorant about investing, I bought the following bond for about £2,300... http://www.hl.co.uk/shares/shares-search-results/b/bank-of-ireland-13-38-uns-perp-sub-bds

    I bought it just because it had a high yield (yes, I know, this wasn't a very bright thing to do). Now that I am a bit more savvy, I am trying to figure out if I should get out now while I can?

    If I sell now I will loose about 80 quid in transfer fees as it hasn't moved. Obviously loosing 80 quid is rubbish, but it's not as bad as loosing a lot more than that.

    I've tried to Google it and have looked on the BOI investment page but can't find any info on this particular bond. I was hoping the MSE community might have some input. There isn't any risk information on Hargreaves as there would be with a fund. Majorly stuck and I don't have any friends or family who would know either.

    Thanks in advance
Page 1
    • msallen
    • By msallen 11th Jan 18, 3:26 AM
    • 620 Posts
    • 603 Thanks
    msallen
    • #2
    • 11th Jan 18, 3:26 AM
    • #2
    • 11th Jan 18, 3:26 AM
    Its an old Bristol & West BS bond, who were subsequently taken over by BOI. A valid constituent of a widely balanced portfolio, but more suitable to the professional investor and I wouldn't want to hold on its own, just as I wouldn't hold BOI shares (or indeed anyone else's) on their own.

    As with all bonds, the price will fall as interest rates rise. Consider that if it falls in price by 10% that will be equivalent to (very) roughly 2 year's worth of coupon.

    Link to it's prospectus can be found at https://www.fixedincomeinvestments.co.uk/permanent-interest-bearing-shares-pibs-table-prices/
    • bowlhead99
    • By bowlhead99 11th Jan 18, 3:44 AM
    • 7,127 Posts
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    bowlhead99
    • #3
    • 11th Jan 18, 3:44 AM
    • #3
    • 11th Jan 18, 3:44 AM
    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.
    • firestone
    • By firestone 11th Jan 18, 9:07 AM
    • 108 Posts
    • 40 Thanks
    firestone
    • #4
    • 11th Jan 18, 9:07 AM
    • #4
    • 11th Jan 18, 9:07 AM
    while i don't know much about these type of bonds and if i did not sure i could answer as well as bowlhead99 i assume they are more favoured by retired people.So i think he makes a good point in that if you are not happy now and would not be in the future then you may want to take a loss at some point for peace of mind.But from looking up a product before you could try the Fixed income investor site which has info on different bonds etc and which also has a forum-which while not as active as this site may have discussed your bond
    Last edited by firestone; 11-01-2018 at 9:10 AM.
    • Morphoton
    • By Morphoton 11th Jan 18, 11:59 AM
    • 68 Posts
    • 58 Thanks
    Morphoton
    • #5
    • 11th Jan 18, 11:59 AM
    • #5
    • 11th Jan 18, 11:59 AM
    One comment I would make with regard to the perceived risk, is that the market ascribes similar yields to similar bonds of other institutions:
    BOI 5.75% (Reference)
    Coventry BS 12.125% PIBS: 5.40%
    Leeds BS 13.375% PIBS: 5.85%
    Nottingham BS 7.875% PIBS: 6.15%
    Skipton BS 12.875% PIBS: 5.65%
    So the market does not perceive that the BOI bond is currently more risky than the additional 4 bonds I have stated above.
    Disclosure: I own the 4 additional bonds stated above.

    Links:
    http://www.hl.co.uk/shares/shares-search-results/c/coventry-building-society-12-18-pibs
    http://www.hl.co.uk/shares/shares-search-results/l/leeds-building-society-13.375-pibs
    http://www.hl.co.uk/shares/shares-search-results/n/nottingham-building-society-7.875-pibs
    http://www.hl.co.uk/shares/shares-search-results/s/skipton-building-society-12.875-pibs
    • sixpence.
    • By sixpence. 11th Jan 18, 6:23 PM
    • 58 Posts
    • 15 Thanks
    sixpence.
    • #6
    • 11th Jan 18, 6:23 PM
    • #6
    • 11th Jan 18, 6:23 PM
    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.
    Originally posted by bowlhead99
    Thank you so much for this and to everyone who has taken the time to respond to this. I feel a lot less worried. Seriously thanks so much.

    I am leaning towards selling, losing the 80 quid, and sticking it in my VLS 60 where it belongs. We all make mistakes and I have made gains over the years (despite not really knowing what I was doing...) so this feels par for the course.

    Can I just clarify: I have £2300 invested in these bonds, so shouldn't that yield £307.63 a year? (at a 13.375% yeild). Or have a I got this wrong too?

    The yield is biannual so I've thought of sticking it out until the first payment date (May) but I'm not sure if it's worth the risk/stress and worry.
    • bowlhead99
    • By bowlhead99 11th Jan 18, 6:44 PM
    • 7,127 Posts
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    bowlhead99
    • #7
    • 11th Jan 18, 6:44 PM
    • #7
    • 11th Jan 18, 6:44 PM
    .

    Can I just clarify: I have £2300 invested in these bonds, so shouldn't that yield £307.63 a year? (at a 13.375% yeild). Or have a I got this wrong too?
    Originally posted by sixpence.
    Maybe you misunderstood my earlier post.

    They pay annual interest of £13.375 per £100 of face value, or £133.75 per £1000 of face value for these bonds. By buying at the December market price, you paid about £2300 for your £1000 of face value.

    So, each year you will get £133.75, which is 13.375% of the bond's £1000 face value, but unfortunately that's only about 5.8% of the total cash you decided to pay for the bond when you bought it on the bond market.

    The yield is biannual so I've thought of sticking it out until the first payment date (May) but I'm not sure if it's worth the risk/stress and worry.
    As you mention, the yield is paid twice a year so you can look forward to getting half of the £133.75 each time. You could wait to receive that if you like.

    However, if the price has changed for the worse, you might find yourself losing more than the £80 that the current price implies, and then having some interest income to pay tax on. That might be unwelcome if you don't even want the investment anyway and just want to put the proceeds back into VLS60 or whatever and get on with your life. But, you might like it on the grounds that the best education is often from learning from one's mistakes. And if all goes well the market might move the other way and make you a profit.
    • Thrugelmir
    • By Thrugelmir 11th Jan 18, 6:51 PM
    • 56,685 Posts
    • 50,060 Thanks
    Thrugelmir
    • #8
    • 11th Jan 18, 6:51 PM
    • #8
    • 11th Jan 18, 6:51 PM
    Can I just clarify: I have £2300 invested in these bonds, so shouldn't that yield £307.63 a year? (at a 13.375% yeild). Or have a I got this wrong too?
    Originally posted by sixpence.
    The yield referred to is based on the coupon paid on the nominal value of the stock. At the outset every £100 of nominal stock purchased would have yielded £13.37p.

    You didn't pay £100 for every £100 of nominal stock. But over double. Resulting in your yield being some 5% - 6%.

    If you look at the HL webpage there'll be a running yield quoted.

    The other issue you face. Is that the BOI might consider this to be a good time to buy in the stock and refinance at a lower coupon rate. As they only need pay £100 for every £100 of nominal stock held. The consequence of which is that you would lose half your capital.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • AlanP
    • By AlanP 11th Jan 18, 9:07 PM
    • 1,045 Posts
    • 746 Thanks
    AlanP
    • #9
    • 11th Jan 18, 9:07 PM
    • #9
    • 11th Jan 18, 9:07 PM

    The other issue you face. Is that the BOI might consider this to be a good time to buy in the stock and refinance at a lower coupon rate. As they only need pay £100 for every £100 of nominal stock held. The consequence of which is that you would lose half your capital.
    Originally posted by Thrugelmir
    I've not invested in any bonds like these and have no plans in the foreseeable future, but that is something I hadn't realised. I assumed the bond was worth market value up until stated redemption date. Thanks for highlighting it. Makes the current return of ~5.8% look low for the risk level doesn't it?

    Given that why don't BoI and the others do just that? The only reason I can think of is reputation as future investors may be put off.
    • bowlhead99
    • By bowlhead99 11th Jan 18, 9:45 PM
    • 7,127 Posts
    • 12,930 Thanks
    bowlhead99

    Given that why don't BoI and the others do just that? The only reason I can think of is reputation as future investors may be put off.
    Originally posted by AlanP
    Some bonds can mature on a specific date or be called in on an earlier specific date or date range in which case you should really be calculating your effective "yield to maturity" taking account of what you'd prudently get on maturity or other earlier date.

    However other bonds are 'perpetual' in nature without a fixed maturity date and can only be called in if the bondholders agree to it (which they wouldn't want to do for less than the fair market value of just holding the bonds and receiving the income forever). In such a situation the issuer can't just unilaterally decide he wants to pay off the loan and stop paying the interest. He would have to buy himself out of the contract.

    Part of doing your due diligence on a prospective purchase of a bond is reading all the small print of the bond instrument to understand the issuer's rights and obligations. If you just rely on an information table on a broker or financial blogger's website, or anecdotes you hear on a bond forum's message board, you might make the wrong judgement and misprice the risk and return by not recognising what the bond issuer or other market participants might do to improve the economics for themselves at your expense.
    • Thrugelmir
    • By Thrugelmir 11th Jan 18, 10:34 PM
    • 56,685 Posts
    • 50,060 Thanks
    Thrugelmir
    Given that why don't BoI and the others do just that? The only reason I can think of is reputation as future investors may be put off.
    Originally posted by AlanP
    Read the small print. Even perpertual bonds may have certain conditions attached. Which gives the issuer a right to call the stock in under certain conditions or at specific points of time.

    Makes the current return of ~5.8% look low for the risk level doesn't it?
    You also face the loss of capital. As interest rates rise. The market value will correspondingly fall. However unlikely BOI is going to default.
    Last edited by Thrugelmir; 11-01-2018 at 10:37 PM.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • sixpence.
    • By sixpence. 11th Jan 18, 10:35 PM
    • 58 Posts
    • 15 Thanks
    sixpence.
    I find bonds hard to understand. I think I will sell and just let the bonds make up the 40% of my vanguard and be done with it. Oh well, that's 80 quid I could've spent on beer and cheese burgers. Do your research. Lesson learned.
    • badger09
    • By badger09 12th Jan 18, 1:34 PM
    • 5,587 Posts
    • 5,026 Thanks
    badger09
    I find bonds hard to understand. I think I will sell and just let the bonds make up the 40% of my vanguard and be done with it. Oh well, that's 80 quid I could've spent on beer and cheese burgers. Do your research. Lesson learned.
    Originally posted by sixpence.
    Not a bad result overall then
    • eskbanker
    • By eskbanker 12th Jan 18, 2:06 PM
    • 6,054 Posts
    • 6,055 Thanks
    eskbanker
    Oh well, that's 80 quid I could've spent on beer and cheese burgers.
    Originally posted by sixpence.
    Surely martinis? Shaken, not stirred....
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