Provident Financial 7% 2020 Corporate Bond

RayWolfe

purch wrote: »

There can't be anything in it for them can there :eek:

............ as if!

Primrose

What looks like a good deal now may not be such a good one in 10 years time. I'd be very reluctant to tie up money for that length of time. Certainly anybody who has already retired would need to think very carefully. Life's needs can change very suddenly in later years and having more than a small chunk of your money tied up for such a long time may not be a sensible move. Even if you can withdraw some of it at any time in an emergency, the penalty you pay could end up negating the value of the deal.

ChumpusRex

stphnstevey wrote: »

I have do admit, I haven't had time to delve deeper yet and of course would do before even dreaming to invest.

Is this a fixed rate of return - ie 7%? or does this vary with the bond price (like a fund or share)?

There seems to be a garantee of at least a return of at least your minimum investment - is this not the case?

2. The amount of return is fixed (hence bonds are often called 'fixed-income').

Bonds have a 'face value', a 'coupon' and a maturity.

A bond with a 'face value' of £1000, 7% coupon and 2020 maturity, will pay £35 at 6 monthly intervals, with a final payment in 2020 of £1035 (representing the return of the 'face value' + the last 6 months interest).

The face value, maturity and coupon are all fixed at the time the bond is issued, and does not change. Note that there is no way to 'cash in' the bond, and get the face value back early. If you need cash, then you have to sell the bond to someone else - and the price they might offer is likley to be different to the face value.

Let's say that the BoE raises interest rates to 10%. Your £1k face value bond would continue paying £70 per year interest. That's pretty rubbish, considering that cash in your bank account would probably get more than that. If you had to sell the bond, you might only get £800 for it. (The new buyer of the bond would continue to receive £35 2x per year, and a final payment of £1035).

The ratio of the price paid, to the return, is called the yield. There are 2 types of yield.
Flat yield - which is the annual interest divided by the price paid. In the resale example above (70 / 800 = 8.75%).
Yield to maturity (the more useful measure) - which takes into account the fact that you get the face value back at the end. Assuming that you're the 2nd buyer of the above bond in 2012 - paying £800 - the YTM would be 10.86%

Not only that, but bonds don't trade as frequently as shares. There may be a large spread between buying and selling prices on the stock exchange (potentially several %).

If your intention is not to tie your money up for 10 years, then caution is required, because, as the example above shows, you can make a big loss if you have to sell before maturity.

The bonds (the interest payments and return of your capital) are 'guaranteed' by the company that is issuing them bond. A bond is a loan. The bonds are guaranteed in the the same way that you 'guarantee' to pay your credit card bill.

The guarantee is only as good as the company making the guarantee and the collateral that they put up for it. (E.g. for a mortgage, the bank has your house as security). If the company collapses, then they may not be able to repay the bond - there is no government guarantee or insurance scheme to repay your money if this happens. If the comapny can't pay everything they owe, tough. The only solace, is that bondholders go ahead of shareholders in the queue to pick at the company's carcass if it goes bust. This doesn't happen often, but it's the the difference between losing some (30-70% seems to be the usual range) of your money (bondholders) or 100% of your money (shareholders)

This particular bond represents an unsecured loan, to a medium sized company in a relatively high risk business (doorstep and subprime money lending). This same company offered a very similar bond last year, which is currently trading for a YTM of about 7.2%. By contrast, Tesco have a October 2019 bond which is currently trading for about 4.6%, and the British Government have a 2020 bond which is trading for about 4.1%. The difference is yields represents the price investors are willing to pay for guarantees of different quality.

sabretoothtigger

The Tesco one there straight away appears to be better value but I would expect the price to buy it now to reflect that


Government also have index linked gilts. I think 2% is available which would be the RPI rate + 2%. Probably very expensive to buy though I dont hold bonds personally so wouldnt really know

These account for around a quarter of UK government debt.

http://en.wikipedia.org/wiki/Gilt-edged_securities#Index-linked_gilts

ChumpusRex

BigJonnyB wrote: »

can you hold corporate bonds in a s&s isa? If so isn't the interest tax free?
If you had money that you could lock away for 10 years (in this case) then this would be quite a good option? If you view them as safe that is?

Yes. Corporate bonds can be held in an ISA, and can be held until maturity. However, you cannot buy them if the bond has less than 5 years to maturity.

The same maturity rule also applies to British Government bonds (gilts).

sabretoothtigger

why would that be especially

ChumpusRex

Because that's what tax law permits.

I suspect it's to do with the value of different types of investment. Money from long term investments (shares and long-duration bonds) are more useful to companies in order to fund expansion, and build a business.

Short-term bonds don't tie up your money in the same way, and so don't have the same effect on investment. Some very big companies do offer ultra-short term bonds, often called 'commercial paper' on the 'money markets' (e.g. 7 days duration) - and they use the temporary cash boost like an overdraft, to cover a particular big bill. Banks will often buy up these ultra short bonds with customers current account money - this allows the bank to get some interest in, but if the customers want their money back, the money isn't tied up for very long.

So, I suspect it's the fact that short bonds (less than 5 years) are too much like 'cash', for a 'shares ISA'. And it's why you get a bigger allowance for a shares ISA than a cash ISA, because in a shares ISA, your investment is getting reciculated in the economy in a way, which encourages productive investment.

Zeerust

Also try ...

http://www.fixedincomeinvestor.co.uk/x/default.html

Discusses bonds and a section "learn about bonds" top right.

And a discussion on Fool regarding the Provident Financial bond

http://boards.fool.co.uk/Message.asp?mid=11878182&sort=whole#11878477

jamesd

purch wrote: »

I wonder why H&L are pushing this issue so strongly. ... There can't be anything in it for them can there :eek:

I'd say a fairly sure four and a quarter million with the potential for eight million is worth a spot on their home page and some promotional mailings.

0.7% initial fee and 0.5% trail fee paid by the issuer for the life of the bond. I don't know if HL will in addition charge consumers the 0.5% fee it has for investments that don't pay commission but if yes then it's a nice 1% a year earner for them for the next ten years. £375,000 for HL in that trail if it's just the built in 5%, potentially £750,000 a year for the ten years if it's mostly bought by customers paying the extra half percent. Add £525,000 for the 0.7% initial fee and it looks something between £4.27 million and £8 million. Presumably also some dealing fees along the way to add to the revenue stream.

strawberrylane

I don't know if HL will in addition charge consumers the 0.5% fee it has for investments that don't pay commission

No it won't on this.