2.5% Consols redemption

caper7

I inherited some 2.5% Consols from a relative many years ago.
I never really knew what they were until I researched them a few years back, wondering whether I should sell them.
Luckily I didn't as the Government are now redeeming them at par.

My question is, is this a good thing?
Should I be happy, or given the current low interest rates is this bad news.

Would be interested in other more financially savvy people's opinion!

Nb: It says a payment of £100 will be made for every £100 nominal held. Does this mean you only get your money to the nearest hundred back, or your exact capital sum?

many thanks.

EdGasket

Historically they have been valued at less than £100 because interest rates have generally been more than 2.5%. I think you can be satisfied to be getting £100 back per 100 bonds though if interest rates stayed at these low level indefinitely then the Consols would be worth more than £100. Anyway the gov't has the option to redeem them so you don't have a choice.

You should get back £1 for every bond you hold.

bowlhead99

It is good news for the government, and great news for you as a holder. A bit of explanation on how they work

The bonds pay a fixed percentage on their nominal value. Say you have £100 of nominal value, you'd get a payment of £2.50 a year (actually it's paid quarterly or maybe twice yearly, I forget, but it's a bit of a better interest rate than a straight 2.5% at the end of the year).

But these things are traded on a market.

Everyone knows that unlike bonds with a fixed maturity date, government won't be forced to pay these particular type of loans back if they don't want to, so instead of getting your £2.50 every year for five years and then getting your £100 back at the end (which would mean a real effective interest rate of 2.5%), you'd get £2.50 for five years and not get any of the £100 back... just keeping getting those £2.50s year after year until they became meaningless amounts of money due to inflation.

So, nobody would buy those bonds off you for £100 and take only a 2.5% return which dwindles away to nothing in real terms. So a year ago, the bonds were trading at £60 per £100 of nominal. That meant that the £2.50 a year fixed payment would represent over 4% on the buy price, which was thought a fair price -considering you might never get to redeem them and you were just stuck getting the £2.50s forever.

But at the moment, interest rates are really cheap and the government can get long term finance at close to all- time- low rates. If it has some old consolidated loan stock costing it £2.50 per £100 every year, or some other war loan costing it £3 or £4 on every £100 every year, it can make a lot of sense for the treasury to just pay up the £100s, and then finance it if necessary by the issue of new long term loan notes (with a fixed repayment date this time) on which lenders wouldn't demand as much as £2.50 or £3 or £4 per £100.

It would cost it a few hundred million quid to do, but if it can replace it with a few hundred million quid of borrowing at nice low long term rates, it saves a few million on its interest bill every year.

So, giving notice to voluntarily pay up the old loan stock was worth doing, from the government side. For you as a holder it was awesome, because all of a sudden what was only worth £60 last year ago and paying 4%, is now worth £100 cash in your hand. So, once it was announced that this would happen, the 2.5% consols shot up in value and are now trading around £100. They are still paying their £2.50s each year, but soon you will have to give the consols back and take the £100 cash.

At that point if you want to buy another investment (government bonds, company bonds, company shares, investment funds etc), you can. Or go on a spending spree. But basically I would see this as a win win for both the treasury and for individual holders like you.

I think the £100 for £100 nominal is just their way of saying, paid in full. If you have £199 nominal they wouldn't just pay out the first £100 and not the £99.

redux

The government is buying back these loans, parts of which date back to even before Napoleonic times, because interest rates are at a historic low that is below the 2.5% coupon rate.

Then borrowing money from pensioners at 4%.

caper7

Thank you all for the responses, particularly Bowlhead99 for the really thorough explanation. I now get why people would buy these stocks for 50odd% of the nominal value, in fact I wish I had bought more, because that would be a guaranteed 5% interest if I've understood things correctly, and of course the redemption would have meant a big profit on the capital value too. However one musn't be greedy...

However, Redux, you have a point, why are the government paying over the odds for pensioner money? Suspect it may be more a tactical election strategy.

Issy005

OK - So I have (had?) some - where is my money? Yes I've moved address but the bank where the dividends are paid should know my current address.. They used to be paid to the post office, then I think TSB... who do I ask?

grey_gym_sock

Issy005 wrote: »

OK - So I have (had?) some - where is my money? Yes I've moved address but the bank where the dividends are paid should know my current address.. They used to be paid to the post office, then I think TSB... who do I ask?

i guess your standing instructions for where to pay the income don't apply to a capital repayment, such as on redemption. (i don't have any gilts in my own name, but when i've had shares in my own name, that's how it's worked.)

according to http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts -

The gilt registrar, Computershare Investor Services PLC, has attempted to contact all registered stockholders regarding the redemption of the undated stocks. However, there remains a number of unclaimed payments and if you believe that you may have held an undated stock and have not received the redemption proceeds you should contact Computershare for further information about how to claim any payments due.

the redemption date was 5 july 2015, so you don't own these gilts any more, but you are owed the capital repayment.

Issy005

Except - you cannot contact them... the Registrar is 0370 702 003

AndyT678

http://www.computershare.com/uk/business/other/contact-us

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catz1ct

Their email address used to be [EMAIL="web.queries@computershare.co.uk"]web.queries@computershare.co.uk[/EMAIL]. Might be worth trying to see if it is still in use.