To break a bond or not to break a bond?

TheLondoner

cwep2 said:

The best way to think about it is what are likely returns:
Assuming bond matures 1st April:
Keep it in there, you get 4 months interest at 4.15% = approx 1.38% return.
To pull it out you lose 3 months interest so you are down 1.04% (vs accrued interest up to today) so the breakeven is 2.42% in the share by 1st April.

If you make 2.42% in the next 4 months on the alternative (-fees) then you are better off, if you don't you are worse off. The 2.42% in 4 months is an annualised rate of 7.26%.

Bear in mind you will lose ~2 weeks whilst they close the bond, put cash in holding account, transfer it to a new ISA etc. If it took a month to do this (worst case scenario) you'd need to make 2.42% in 3 months which is 9.68% annualised.

BUT you will pay 0.5% stamp duty buying shares as well, so the share now needs to go up 2.92% to break even (that's assuming zero trading fees as well). This pushes our annualised rates required to 8.76% and 11.68% depending on whether you have 3 or 4 months to do it, with the likely timing somewhere in between.

But of course shares move much more - LGEN was 203.1p in late October and went up to 232.9p less than a month later which is over a 14% move. In reality if you had cashed in your bond on 25th October hoping to buy the shares at 204p (where it was that day), 2 weeks later when the transfer has (maybe) gone through it was now at 220p some 8% higher. The timing of when you buy and sell will make much more of a difference than the annual return. 

If you want to buy the shares, the timing will make much more difference than the interest penalty, but from a *money saving perspective* the expected value on annualised return to be at breakeven if you buy shares rather than keep it in the bond (with the assumptions above) would be somewhere between 8.76% and 11.68% which is higher than the dividend yield (8.53% according to HL.co.uk).

Caveat - if the bond matured 30th April these would be lower, using 5 months until maturity instead of 4 months the ballpark levels would be 7.85% to 9.81%. You didn't tell us exactly when it matures. 

Great post, Thanks. I think i'll hold fire for now. Might enquire with Santander to see how long the process is to close. If L&G does move back around the £2 mark I think I will keep in mind moving to them early. Bit of a risk but i'm in it for the long haul so won't be too fussed with minor changes - I want to do it for the divvy primarily. 

TheLondoner

subjecttocontract said:

It's a 2 year fixed rate bond, fixed in May 2022 when bank base rate was 0.75%.
I decided back then that with interest rates so low, any savings account that offered a prize draw made perfect sense......I was giving up around £20 a year in interest for the chance of a prize win, fortunately it's just £5K.

I think even for the chance of prize money it was a bad call back then. Surely if you wanted prizes premium bonds would have been a better call, or are you more likely to win with halifax?

subjecttocontract

Are you joking ? How can spending less than 40p a week on a prize draw be considered 'a bad call' ? I've heard of people being carefully with their money but thats taking things a bit to far !