Query-buying corporate bonds

C_Mababejive

I have read a little but am still unfamiliar..

For example

ENG4 National Grid Plc

02 Feb 2024

Coupon 5.875%

Mid price 106.890

Income yield 5.500

Yield to maturity 5.070

Can anyone explain for this example what coupon/income yield and yield to maturity means?

Also are yields gross or nett of tax and what would the net figures be for basic rate taxpayers.

What happens if i sell before 2024?

Ta

Linton

First part of an answer..............

When a bond is first issued, it is issued at a price, say £1 and pays % of that price annually. However if it is then sold on its price becomes subject to market forces and so could be more or less than the price at issue. But the annual interest remains fixed.

So the coupon yield is the % interest at issue.

The income yield is the annual interest as a % of the current price.

When bonds are issued they are guaranteed to be redeemed at the initial selling price at a fixed maturity date in the future. So if you bought now and kept the bond until maturity you would overall have gained all the fixed interest + the profit (or - the loss) on the difference between your buying price and the initial price.

This total gain can be expressed as a yield to maturity.

In your example the current price is higher than the issue price. Therefore the income yield is less than the coupon yield and the yield to maturity is even lower because you also make a loss on the actual bond itself, should you hold it until maturity.

Linton

Second part of an answer......

Yields are gross and are subject to income tax at the standard rate, unless of course they are held in an ISA.

You sell at any time at the market price - same in principle as shares. Since bonds have a guaranteed price at maturity they are unlikely to deviate greatly from the issue price, unless of course the market believes the company wont have the funds to honour the interest commitment or redeem them. Their price could then become very low ("junk bonds").

I see that bonds arent subject to capital gains tax, but the chances of you holding enough bonds for that to be an issue are perhaps rather low.

C_Mababejive

So would i be paid out annually then and does the above example look like a reasonable deal?
It seems like a good bet to me though im of course no expert !

Ta

Linton

Compared with bank interest at the moment it's is a good deal - hence the current price is higher than the issue price.

But it is a bit more risky than bank interest in that if you sell early you could make a loss on the bonds, if for example bank interest rates increased and so made bonds less interesting to investors. And of course bonds are not covered by any government guarantee.

On the other hand perhaps the future of National Grid should be pretty safe.

Yet again on the other hand you could buy Nat Grid Shares and get dividends of a similar % effectively tax free. And of course the shares and dividend would be expected to increase broadly with inflation (or of course may not!).

So to summarise it's a bit better than bank interest but a bit more risky. Shares are even better, but of course are even more risky. You need to choose where you are happiest on the risk/return graph.

Loughton_Monkey

Not sure I would buy such a bond.

Let's assume National Grid to be 100% safe [Not strictly true but pretty much so].

When you buy such a bond, technically you have therefore done more or less the same thing as when you invest in Coventry Building Society's 6 year 4.75% savings bond. Except you are investing for a 13 year period here. So 5.07% sounds a pretty poor rate by comparison.

The difference is that you can sell it at any time (unlike Coventry's offering). Now in the short term, you are getting 5.5% interest. That's not bad. But in truth, you are a bit 'stuffed'. If interest rates in the market start rising, then 5.5% will start to look pretty sick. You might want to sell your bond, but people will want, say, 6.5% so your bond price will go down to nearer 90 (so that the 5.875% coupon represents about 6.5%). That's a very hefty drop! Over 15% of your investment. Like Coventry allowing you to withdraw your money with a 15% penalty. You wouldn't do it!

Of course it's a bit more complicated than that. When equity share holders get a 'twinge' on their seaweed that another crash is happening, they will pay good prices for a 'safe' bond like that. Next best thing to cash.

purch

ENG4 National Grid Plc

02 Feb 2024

Coupon 5.875%

Mid price 106.890

Income yield 5.500

Yield to maturity 5.070

OK

So if you decided to buy this paper.

If you wanted to buy £ 10,000 of the paper, at the price of 106.89 it would cost you £ 10,689

You would hold £ 10,000 face value (nominal) on which you would receive the coupon, so annually you would receive £ 587.50 interest.

This equates to a return of 5.5% on the £ 10,689

If you hold to maturity you will receive the face value back £ 10,000, plus also having received you 24 years worth of £587.50

This equates to an overall return of 5.05% on your original investment of £10,689

If you sell the paper before the maturity date, the price you get will depend on market conditions at the time, and all the numerous things that can affect bond prices.

If you sell for a higher price you will have made a capital profit, lower price a capital loss.

If the transaction isn't made on 2/2 in any year you will also received the accrued interest for the part of the year held.

chucknorris

I'm thinking of buying a corporate bond for my stocks and shares isa this April. As far as I know it has to have at least 5 years to maturity otherwise you can't wrap it in an isa. Like LM said the risk is higher savings rates, so 5-10 years would probably suit me best.

In an isa your net 5.07% becomes 8.45% gross if you are a higher rate tax payer so it should be competitive against savings rates (on average) for quite some time. I would hold to maturity so would probably go for under 10 years remaining life.

What I don't know is:

1. What commission and/or spread you pay on buying
2. What amounts can you buy in
3. Can the income be paid into an isa account to keep it's isa status

Perhaps someone could help with the above questions ?

purch

1. Commission can vary from the normal online dealing price, to much higher (£30 plus) depending on where the Bond is listed, and whether or not there is a market made in it. If you look on Bondscape, you can see a list of paper that should be available on most dealing platforms at online rates. Selftrade show a list of Bonds you can deal with them, and they show which one's can be dealt online, which need a telephone trade and those that can only be ordered.

Much like above. The spreads on the bonds that are easily dealt online will be tight, getting wider for those that are harder to deal in.

2. Typically £ 5,000 plus. Again, like above the bonds that are easiest to trade in, will also be the one's that are easier to trade in smaller amounts. The spread might be wider on smaller amounts however, and some bonds will have higher minimum amounts.

3. Je n'ai pas la moindre id!e

pqrdef

chucknorris wrote: »

3. Can the income be paid into an isa account to keep it's isa status

Same as share dividends and distributions from funds. Your ISA provider receives the money as your nominee and disposes of it as per instructions. It can stay within S&S ISAs, but there's no way to get it into a Cash ISA except as new money.

chucknorris

pqrdef wrote: »

Same as share dividends and distributions from funds. Your ISA provider receives the money as your nominee and disposes of it as per instructions. It can stay within S&S ISAs, but there's no way to get it into a Cash ISA except as new money.

Thanks, I was hoping it could be paid into one of those money isa accounts (classed as stocks and shares), I know they pay hopless rates but I think it would still be better to suffer that low rate until buying the next corporate bond isa in the following tax year to keep it under an isa wrapper. Would that work?