Serious Cash

underground99

valiant24 said:

Malthusian said:

valiant24 said:

Deleted_User said:

They have yields < 0.1% - see the last column in https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 ... which makes those 0.5% savings accounts look good

Please can you explain why the top one (07/06/21) seems to have such an attractive rate?

8% isn't the rate, if that's what you're looking at. The rate is 0.358%, i.e. the yield.

It has a coupon of 8% because that was the going rate for lending money to the UK government when it was issued in 1996. But you won't get 8% because it's only got two months worth of coupons left before it returns £100 for every £101.23 you put into it (at current prices).

No, I was looking at the yield (0.358%).  

The redemption yield for the bond maturing in early June 2021 is showing as being over 0.3% while the other ones expiring between now and Jan 2023 have yields of about 0.06% or less. It's logical to wonder why.

Perhaps, there is not a lot of demand from people for going to the trouble of buying a bond which is going to mature in only a couple of months' time - incurring bid-offer spread and stockbroker dealing commissions to do it - when it is going to expire soon and make you start again. You might prefer to buy a bond that expires in a few years instead and could be sold on to someone else whenever you like. 

But more likely, depending on the data source, it is just a quirk of roundings in the maths when the maturity date gets very short. The person doing the calculations might have just been rounding to the nearest month, causing some error. 

 I pay £101.23, get 2 months interest on that (£100 x 8% x 2/12 = £1.33) - if that's how it works! - so total £101.33 back for a profit of (£101.33 - £101.229 = £0.101.
I don't see how that equals a 0.358% yield. 

Unfortunately that's not quite how it works as you will not be paying only £101.23. The mechanism to make sure you pay a 'fair' amount of money for the bond is to charge you an amount on top of the 'clean' price of the bond (i.e. on top of the £101.23) for the interest already 'earned' that you will collect on maturity. You pay this when you buy.

The bond doesn't actually pay interest daily or monthly, but semiannually. So it's £4 every 6 months for £8 total per year, for every £100 of face value.

If the bond has a mid-price of 101.229p and is already a good proportion of the way through the current 6-monthly interest period towards the interest payment date... when you buy it you will pay the asking price and also the interest accrued since the last payment date. So if you wanted to buy £100 face value of bonds, you would pay market price for the bonds (£101.23) and also the 128 days interest at 8% a year (about £2.81) so in total that would be £104.04.  That's before stockbroker commissions, and the practical reality that if the mid-price was 101.23 you would need to pay a bit more than that because there's a small spread between the market bid price and market offer price.  So you are going to be paying at least £104, and then in early June the bond is going to mature and pay you back £100 + £4 interest.  So you will lose money. The redemption yield is slightly negative.

But on that site, it was showing slightly over 0.3%. So it's just an error.

As you can see, when the amounts and timescales are very short, 10p either way can be the difference between profit and loss.  For example you are thinking you would get £1.33 of interest for two months. But there are not a full two months left, more like 56 days left, so you should only be expecting to make £1.23 of interest rather than £1.33 of interest. So your estimate that you would make 10p profit was out by a whole 10p. The reality is that you will not make a positive yield at all.

valiant24

underground99 said:

 You might prefer to buy a bond that expires in a few years instead and could be sold on to someone else whenever you like. 

Thanks.   But why would I buy a gilt maturing in, say, 2028 at all if I'm only going to get 0.6% (per year presumably?) interest?

Also, are you able to explain please why the 2 later gilts listed for maturity in 2028 have such different yields, please (one is 0.67% and one 0.90%, but they mature within a couple of months of one another)?

Malthusian

valiant24 said:

underground99 said:

 You might prefer to buy a bond that expires in a few years instead and could be sold on to someone else whenever you like. 

Thanks.   But why would I buy a gilt maturing in, say, 2028 at all if I'm only going to get 0.6% (per year presumably?) interest?

Because you are an institution which does not have access to retail best-buy cash accounts, and need somewhere reasonably safe for your money over that period.

The second question I can't answer, sorry - it does look odd, especially as the longer-dated gilt beneath it has a lower yield.