new Tesco Bond 5.2%

The_White_Horse

I saw this advertised in the Sunday Times yesterday - what do people think about it? good, bad ugly???

all advice greatfully received.

Cheers.

jimjames

Other MSE discussion here.

https://forums.moneysavingexpert.com/discussion/3033210

Remember it is not a savings account.

Loughton_Monkey

By buying this bond, you are effectively tying up your money for 7 years. This is a very long time, and as we all know, anything could happen in those 7 years. What if the Bank Base rate returns to a more 'normal' 4% in a couple of years, and we can all get 5.5% guaranteed on a 1 year fixed term investment?

Personally, I would only invest in a 5 (or more) year fixed rate if it were backed by a 'get out' clause (such as 6 month's notice). Such a 'get out' clause will usually be enough to guarantee you can 'get out while you are ahead' if and when market rates were to go ballistic.

Bonds such as this have the most expensive 'get out clause' in the world! You can sell it, of course, but only at a great cost. This is because you have bought an investement with 5.25% yield to maturity. If and when 6% becomes the 'market rate' for bond yields, then the price of your bond reduces considerably. So the effect upon sale within the 7 years becomes something like "New owner, 6% yield over 5 years, old owner 3% over 2 years, average 5.25% over 7 years." [You can work out exact figures, but I just guessed these].

I have ignored the investment risk. Buying a traditional 5 year 'fix' comes with FSCs protection. Your Tesco bond has no protection whatsoever, but it is reasonable to assume that Tesco would still be around, and paying debts in 7 years.

jimjames

Some more points:

1) You can get your money back at any point. But may not get back what you bought the bond for depending how rates have moved.

2) It appears that the bond is issued by Tesco bank not Tesco plc so the risk may be higher

3) This is not a savings account bond; it is an IOU issued by Tesco that is traded on the stock market.

Loughton_Monkey

jimjames wrote: »

Some more points:

1) You can get your money back at any point. But may not get back what you bought the bond for depending how rates have moved.

I did a more accurate calculation of this, as in my post.

If, say, bond yields go up to 6% (from 5.25%) by the 2nd anniversary of the 7 year bond. So you decided to sell. The price would be in the order of £968 (per £1000). So a 3.2% drop in value.

The yield for the remaining 5 years, for the new purchaser, would be 6%. the seller would have received 3.69% for the 2 years he ownd it.

JamesU

Loughton_Monkey wrote: »

I did a more accurate calculation of this, as in my post.

LM, you have me a little confused. Are you referring to the generic issue here with fixed rate corporate bond purchases vs their capital value over time or something more specific related to the Tesco bond issue itself?

JamesU

Raysor

The Tesco Bank 5.2% 2018 is good if you are looking for a low risk (parent company is AAA) medium term bond. Being issued at par (£100%) and ISAble
It can be sold, when issued, in the market and should then have a 'value' maybe of 105. Of course if interest rates go up the yield will go down, but it has a safety net of the reemption at par (100) at maturity (2018)

xrjtg

JamesU wrote: »

LM, you have me a little confused. Are you referring to the generic issue here with fixed rate corporate bond purchases vs their capital value over time or something more specific related to the Tesco bond issue itself?

A generic feature of tradeable fixed interest instruments. The average yield is fixed, so if you want to sell to someone expecting a higher yield your yield has to work out lower to compensate, which in practice means selling the bond for less than its redemption value. Not the usual way of phrasing it, but I found it an interesting new perspective.