What would they make of this on the Debt forum?

Generali

gallygirl wrote: »

Yes, thanks, it confused me more than anything!So there is no norm then - if they are looking for a low figure for Germany they would take say 2years, but for a high figure for UK 1 year?

I don't understand all the Coupon/Price/Yield thing, I need to research it

The best way to illustrate this is by a specific, simplified example.

On 29th February 1996, John Major's Government wanted to borrow £23,178,000. They issued 231,780 Gilts* each of which had a value of £100. They were prepared to pay an interest rate of 8%. The interest on a bond is known as a coupon** and in this case was fixed for the life of the bond.

If you bought 1 of these Gilts in Feb '96 then you would be lending the Government £100. In return you would get a coupon worth £8 per year payable twice a year and then on 7th June 2021 you would get your £100 back.The whole of each coupon is paid to the person that owns the Gilt on the day that the coupon is calculated, the so-called ex-date, regardless of how long they have owned it so the price of a Gilt will tend to rise slowly as the 'ex-date' approaches and then fall back on the day after the ex-date.

Since 1996, interest rates have fallen quite substantially so receiving an interest rate of 8% is pretty attractive. As a result, investors are prepared to pay quite a large premium on the original face value for the right to receive that £8 per year in interest. In fact the price as of yesterday was £152.74. That is what is called the 'dirty price' as it includes the fact that if you buy that Gilt today you will be buying the part of the coupon that has built up but not been paid since the last interest payment.

To work out the yield is slightly complicated but in simple terms it means that if you buy the Gilt at the current market price, what is the effective rate of interest that you receive. Yesterday this Gilt would have cost you £152.74 to get £100 in about 10 years plus about £8 a year in the meantime. If you do the sums then that works out the same as getting a rate of interest of 2.14% on your £152.74 purchase price.


* Gilt is the name for UK Government bonds because they used to have a gilded edge on the certificate
** The interest is called a coupon as old fashioned Gilts used to have little coupons along the bottom which you had to cut from the bottom of your bond and sent off to get your interest payment. A 'coupon clipper' used to be American slang for a old, rich mean person who would sit in a cold house clipping coupons to get their interest payments. It sort of brought to mind a rich miser.

gallygirl

Thnaks so much Generali. I sort of knew little bits of that, but not the whole picture - you have explained it very clearly and I have already copied it onto a word doc for future reference.

I guess we're a load of coupon clippers on MSE, in every sense of the word

Thanks again, much appreciated.

Generali

gallygirl wrote: »

Thnaks so much Generali. I sort of knew little bits of that, but not the whole picture - you have explained it very clearly and I have already copied it onto a word doc for future reference.

I guess we're a load of coupon clippers on MSE, in every sense of the word

Thanks again, much appreciated.

No problem.

The term coupon clipper now means someone that clips money off coupons for the local supermarket(s). I think the connotation these days is of the thrifty poor rather than the rich miser. Oh well, such is the richness of language.

FTBFun

What would they make of this on the Debt forum?

(((((((((((((((((((((((((((hugs))))))))))))))))))))))))

Probably

purch

you have explained it very clearly

Shame you didn't explain stuff as clearly to those numpties at Goldmans when you were there Gen

They might have understood what they were doing if you had !!!

Generali

purch wrote: »

Shame you didn't explain stuff as clearly to those numpties at Goldmans when you were there Gen

They might have understood what they were doing if you had !!!

I am increasingly of the opinion that these people knew exactly what they were doing. After all, much of the dot com bubble was stoked by investment banks who knew (and were caught stating) that what they were selling was crap. They were fined less than the profits so it makes business sense to do the same thing again on a wider scale.

Morally, it's the same principle as painting the damp wall of the house or running the car engine for a few minutes before a prospective buyer comes over. Obviously the ramifications spread rather wider in the former case however.

purch

Generali: Mr Milken, do you realise that insider trading, stock manipulation, fraud, stock parking and trying to pretend Junk Bonds are safe Investments is highly illegal ?

Junk Bond King: Sure, but whilst Drexel are paying me $50,000,000 a year and if convicted I'll only get 2 years who gives a !!!! !!!!!

StevieJ

Generali wrote: »

Morally, it's the same principle as painting the damp wall of the house or running the car engine for a few minutes before a prospective buyer comes over. Obviously the ramifications spread rather wider in the former case however.

A couple of good tips there Gen, cheers

Tylerama1

StevieJ wrote: »

For the majors.

Why does the 6 year coupon there, drop to 1.750%, yet a year later is 5% ?

purch

The coupon rate just reflects the market rates at time of issue.

The 5 and 7 year paper on that chart were probably issued 10 or even 15 years ago, and has only 5 or 7 years left to maturity.

The 6 year paper would have been a shorter term issue made more recently.

What matters is the price they are trading at currently, and the yield that reflects.