Corporate Bonds

Lokolo

Ok so I got home today and saw I got a nice magizine from HL. Awesome. Anyway reading through Gilts and Corporate Bonds section and got a little confused by their explination.

Example of a Corporate Bond:

HBOS - 4.375% - 2010 - 4.6% running yield - 6.5% gross redemption yield.

First is obviously provider, second is the 'The coupon which is the rate of interest paid on each £100 of nomical stock' - eh? then running yield which is interest payable from the bond at the current price? I assume thats the yearly rate I would get from this bond?

And finally gross redemption yield 'A measure of the overall return if held to maturity. It is not a measure of return in any given year'. Does this mean this is the AER rate I would get if I hold my bond until maturity?

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And finally, are their risks involved? To me it just looks like a term savings account but obviously they are investments. Eek help.

eeja

Lokolo wrote: »

Ok so I got home today and saw I got a nice magizine from HL. Awesome. Anyway reading through Gilts and Corporate Bonds section and got a little confused by their explination.

Example of a Corporate Bond:

HBOS - 4.375% - 2010 - 4.6% running yield - 6.5% gross redemption yield.

First is obviously provider, second is the 'The coupon which is the rate of interest paid on each £100 of nomical stock' - eh? then running yield which is interest payable from the bond at the current price? I assume thats the yearly rate I would get from this bond?

And finally gross redemption yield 'A measure of the overall return if held to maturity. It is not a measure of return in any given year'. Does this mean this is the AER rate I would get if I hold my bond until maturity?

----

And finally, are their risks involved? To me it just looks like a term savings account but obviously they are investments. Eek help.

You need at least £100K (or $100K ) to buy one bond ( unless they are 10 cents on the dollar as GM bonds are currently ). If you like the idea there are many bond funds available where you need from only £1k to invest in them.
ps what is HL ...??

gozomark

To me it just looks like a term savings account

they are (sort of), but with the risk that if they go bust, you are likely lose all your capital

Lokolo

eeja wrote: »

You need at least £100K (or $100K ) to buy one bond ( unless they are 10 cents on the dollar as GM bonds are currently ). If you like the idea there are many bond funds available where you need from only £1k to invest in them.
ps what is HL ...??

Ah ok. So Bonds are children, Corporate Bonds are men.... Hm I will look at Bonds then.

HL = Hargreaves Lansdowne.

they are (sort of), but with the risk that if they go bust, you are likely lose all your capital

Yeh but things like Tesco..... and Northern Rock... oh.... wait....

eeja

gozomark wrote: »

To me it just looks like a term savings account

they are (sort of), but with the risk that if they go bust, you are likely lose all your capital

Actually the risk is very small for investment grade bonds...much higher for junk bonds (two and a half percent last year was the default rate )
This however is where you can use your local and personal knowledge .
Very high returns are currently available on bonds issued by Dixons, Boots ITV and Cable and Wireless (as an example). If you really know ...perhaps through family and friends working in these Co's that these wont go bust ie they are trading well ...and that's not insider knowledge ...you can get a very tidy return at little risk .

gozomark

no savers with NR lost money, whereas equity and bond holders will get very little back, if anything

Tesco ??

going back to your example (this is a quick explanation, and is not 100% correct)

HBOS - 4.375% - 2010 - 4.6% running yield - 6.5% gross redemption yield.

the bond price is around 95 (not given above, but derived from the data above) - the coupon is 4.375% per 100 nominal value - you can buy at 95 so your running yield is 4.375/95 = 4.6%

the bond matures in about 2 years time so as well as the 4.6% running yield, when the bond matures you will get 100 back - you only pay 95, so you make an additional 5, hence the gross redeption yield being higher than the running yield

jon3001

Here's about what I know on the topic of bond yields etc.

Let's say HBOS issued £100 of corporate bonds and would pay investors £4.375 in interest per year.

The bond is then traded on the open market and its value declines to £95. However it's still paying £4.375 in interest per year. The coupon is 4.375% because that was set when it was issued.

However 4.375/95 = 4.6%. So effectively the yield is 4.6%

If you still holding it by 2010 then HBOS will redeem the bond (which you bought for £95) for £100. So you have a £5 capital gain. The gross redemption yield takes account of both the capital gain and the income (coupon). So it's a bit like the AER but you're getting the lump of the money back on maturity rather than at regular annual intervals.

Lokolo

jon3001 wrote: »

Here's about what I know on the topic of bond yields etc.

Let's say HBOS issued £100 of corporate bonds and would pay investors £4.375 in interest per year.

The bond is then traded on the open market and its value declines to £95. However it's still paying £4.375 in interest per year. The coupon is 4.375% because that was set when it was issued.

However 4.375/95 = 4.6%. So effectively the yield is 4.6%

If you still holding it by 2010 then HBOS will redeem the bond (which you bought for £95) for £100. So you have a £5 capital gain. The gross redemption yield takes account of both the capital gain and the income (coupon). So it's a bit like the AER but you're getting the lump of the money back on maturity rather than at regular annual intervals.

Ah ok that makes resonble sense.

So its a bit of luck when you take out the bond. If value declines then you've lost out (as you didn't buy later) as you get more return?

jon3001

Lokolo wrote: »

So its a bit of luck when you take out the bond. If value declines then you've lost out (as you didn't buy later) as you get more return?

Indeed - you get an extra return (captital gain) when the bond is trading below its issue/redemption value.

However if you bought at issue (or even on the open market later), and interest rates fell, then the value of your bond on the open market would probably go up. The coupon being paid wouldn't be affected. The calculated running yield and gross redemption yield would then both drop accordingly.

stevetodd

Just thought that I would add that you can wrap a corporate bond up in an isa wrapper if it has 5 or more years to run to maturity, which of course makes it tax free (subject to max £7,200 investment of course)

Lokolo

steve - yeh thats why I was looking at it, it adds a bit of balance to my currently risky portfolio.

Jon - ok thats fine. so if I bought at issue the running yield would be the same as the yield?

How does the gross redemption yield work? Say this one is 6.5%, is it basically a little bonus added on top as a 'thanks'?