Corporate bond returning 5%

Stargunner

EthicsGradient said:

Stargunner said:

Linton said:

You do need to understand how investment bonds work.  They are more complex than a simple fixed term savings account.  If you dont understand the gotchas say so and we can explain further.

HL have a list of corporate bonds you can buy from them: https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds.  I would expect HL to be more comprehensive than other platforms, some of which dont sell bonds at all.

If you look down the list you will see an HSBC Bond with a Coupon of 5.375% and a current cost of £99.  That means that it will pay 5.375/99 X 100=5.43% annually until 4th November 2030 at which point you get £100 for each bond.  So you will also make a capital gain of about 1%.

 This is safe unless HSBC go bust.   You can make similar calculations for all the bonds listed.  However it only works out if you hold to maturity.  If you sell before then you may make a capital loss or even a higher gain.

A corporate bond fund has been suggested.  Yes it will remove the risk of getting wiped out by one failure but will bring in the much more likely though less catastrophic risk that you will make an unexpected capital loss when you sell since most of the underlying bonds in the fund will be some way from maturity.

When you follow the link to the HL website it says that the buy price is £1.01. If that is the case you would lose 1% at maturuty rather than gain 1%. Is there a reason that the buy price is showing £1.01?

Note there are 5 HSBC bonds shown there - "HSBC Bank plc", 5.375% coupon, maturing 22 August 2033 is priced at £101.925, while "HSBC Bank plc", also 5.375% coupon, maturing 4 November 2030 is priced at £99.00. You must always be careful about exactly which bond you're looking at.

I am aware of that. What I am pointing out is that when you click on the HSBC Bank one that matures in Nov 2030 and shows a buy price of £99 it takes you to the HL website that shows  the buy price as £101 as shown below

JohnWinder

When I commented on the risk of 50 different bonds I didn't have a fund in mind. I was thinking of buying 50 individually. I doubt there are many corporate bond funds with fewer than 500 different bonds, 11000 in one of Vanguard's. Probably too risky to hold only a few.

MK62

Stargunner said:

Linton said:

You do need to understand how investment bonds work.  They are more complex than a simple fixed term savings account.  If you dont understand the gotchas say so and we can explain further.

HL have a list of corporate bonds you can buy from them: https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds.  I would expect HL to be more comprehensive than other platforms, some of which dont sell bonds at all.

If you look down the list you will see an HSBC Bond with a Coupon of 5.375% and a current cost of £99.  That means that it will pay 5.375/99 X 100=5.43% annually until 4th November 2030 at which point you get £100 for each bond.  So you will also make a capital gain of about 1%.

 This is safe unless HSBC go bust.   You can make similar calculations for all the bonds listed.  However it only works out if you hold to maturity.  If you sell before then you may make a capital loss or even a higher gain.

A corporate bond fund has been suggested.  Yes it will remove the risk of getting wiped out by one failure but will bring in the much more likely though less catastrophic risk that you will make an unexpected capital loss when you sell since most of the underlying bonds in the fund will be some way from maturity.

When you follow the link to the HL website it says that the buy price is £1.01. If that is the case you would lose 1% at maturuty rather than gain 1%. Is there a reason that the buy price is showing £1.01?

There will likely be a bid/offer spread..........though it may or may not be as wide as the HL website is suggesting - however it might be wise to check on the exact prices before committing.

Delburn

Take care if you are looking to invest in this bond, as it does not appear to be a straight forward fixed rate corporate bond.

• The bond is callable by HSBC in 2025 and every 3 months thereafter, i.e. HSBC can choose to repay early, rather than in 2030.
• If the bond is not called in 2025, the interest rate changes to a variable rate of 3 month LIBOR plus 1.50%.  Not sure whether this has changed as a result of the discontinuation of LIBOR.
• Subordinated.

Details are here under the ISIN XS0204377310. 
https://www.hsbc.com/investors/fixed-income-investors/final-terms-and-supplements/subsidiaries?page=1&take=20

MarcoM

JohnWinder said:

When I commented on the risk of 50 different bonds I didn't have a fund in mind. I was thinking of buying 50 individually. I doubt there are many corporate bond funds with fewer than 500 different bonds, 11000 in one of Vanguard's. Probably too risky to hold only a few.

Hi, you are correct about the vanguard bond including over 11k bonds however not sure the income rate is 5% a year?

Linton

MarcoM said:

JohnWinder said:

When I commented on the risk of 50 different bonds I didn't have a fund in mind. I was thinking of buying 50 individually. I doubt there are many corporate bond funds with fewer than 500 different bonds, 11000 in one of Vanguard's. Probably too risky to hold only a few.

Hi, you are correct about the vanguard bond including over 11k bonds however not sure the income rate is 5% a year?

In any case most corporate bonds are only available to corporate investors and may well have a large minimum purchase .  HL probably has the longest list available for private investors on general purpose online  platforms with about 120  of the more popular bonds available (from a rough caculation). That number may well not be the real maximum when buying a corporate bond portfolio  since  many of those bonds may not  be suitable for your objectives because of coupon or time to maturity..

In my view 50 different corporate bonds is way over the top since they are unlikely to be a major part of a sensible portfolio.  There should plenty of diversification from other assets.

Corporate bonds are riskier than gilts since there is no absolute guarantee of repayment but less of a risk than equity since bondholders are higher up the creditors list than shareholders when a company goes bust.  You are unlikely to choose, or even be able to readily access, the very high interest bonds from high risk companies. Of more practical significance is that  corporate bond interest is more reliable than dividends or capital growth.

Cus

Stargunner said:

EthicsGradient said:

Stargunner said:

Linton said:

You do need to understand how investment bonds work.  They are more complex than a simple fixed term savings account.  If you dont understand the gotchas say so and we can explain further.

HL have a list of corporate bonds you can buy from them: https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds.  I would expect HL to be more comprehensive than other platforms, some of which dont sell bonds at all.

If you look down the list you will see an HSBC Bond with a Coupon of 5.375% and a current cost of £99.  That means that it will pay 5.375/99 X 100=5.43% annually until 4th November 2030 at which point you get £100 for each bond.  So you will also make a capital gain of about 1%.

 This is safe unless HSBC go bust.   You can make similar calculations for all the bonds listed.  However it only works out if you hold to maturity.  If you sell before then you may make a capital loss or even a higher gain.

A corporate bond fund has been suggested.  Yes it will remove the risk of getting wiped out by one failure but will bring in the much more likely though less catastrophic risk that you will make an unexpected capital loss when you sell since most of the underlying bonds in the fund will be some way from maturity.

When you follow the link to the HL website it says that the buy price is £1.01. If that is the case you would lose 1% at maturuty rather than gain 1%. Is there a reason that the buy price is showing £1.01?

Note there are 5 HSBC bonds shown there - "HSBC Bank plc", 5.375% coupon, maturing 22 August 2033 is priced at £101.925, while "HSBC Bank plc", also 5.375% coupon, maturing 4 November 2030 is priced at £99.00. You must always be careful about exactly which bond you're looking at.

I am aware of that. What I am pointing out is that when you click on the HSBC Bank one that matures in Nov 2030 and shows a buy price of £99 it takes you to the HL website that shows  the buy price as £101 as shown below

The mid here is 99. The institutional market will likely have a bid/ask spread of perhaps 0.5 for a high grade corp bond like this, so buy at 99.25, sell at 98.75. 
Therefore HL make 1.75% profit on every retail trade.

MarcoM

Linton said:

MarcoM said:

JohnWinder said:

When I commented on the risk of 50 different bonds I didn't have a fund in mind. I was thinking of buying 50 individually. I doubt there are many corporate bond funds with fewer than 500 different bonds, 11000 in one of Vanguard's. Probably too risky to hold only a few.

Hi, you are correct about the vanguard bond including over 11k bonds however not sure the income rate is 5% a year?

In any case most corporate bonds are only available to corporate investors and may well have a large minimum purchase .  HL probably has the longest list available for private investors on general purpose online  platforms with about 120  of the more popular bonds available (from a rough caculation). That number may well not be the real maximum when buying a corporate bond portfolio  since  many of those bonds may not  be suitable for your objectives because of coupon or time to maturity..

In my view 50 different corporate bonds is way over the top since they are unlikely to be a major part of a sensible portfolio.  There should plenty of diversification from other assets.

Corporate bonds are riskier than gilts since there is no absolute guarantee of repayment but less of a risk than equity since bondholders are higher up the creditors list than shareholders when a company goes bust.  You are unlikely to choose, or even be able to readily access, the very high interest bonds from high risk companies. Of more practical significance is that  corporate bond interest is more reliable than dividends or capital growth.

I have dividends paid by a portfolio comprising of CTY, HICL, Bankers, European Asset Trust and renewable infr. With the exception of CTY the rest are all down on capital however not too bothered as I am happy to just draw dividends for the next 20 years. I just want to add further income to this and though corporate bonds could be an option.

george4064

Delburn said:

Take care if you are looking to invest in this bond, as it does not appear to be a straight forward fixed rate corporate bond.

• The bond is callable by HSBC in 2025 and every 3 months thereafter, i.e. HSBC can choose to repay early, rather than in 2030.
• If the bond is not called in 2025, the interest rate changes to a variable rate of 3 month LIBOR plus 1.50%.  Not sure whether this has changed as a result of the discontinuation of LIBOR.
• Subordinated.

Details are here under the ISIN XS0204377310. 
https://www.hsbc.com/investors/fixed-income-investors/final-terms-and-supplements/subsidiaries?page=1&take=20

This is really important for anyone thinking of investing to understand. Since if HSBC decide to call the bond, you'd only get back par when mightve paid more than par and still waiting to 'earn back' the premium over par that you paid when originally investing in the bond.

george4064

Cus said:

Stargunner said:

EthicsGradient said:

Stargunner said:

Linton said:

You do need to understand how investment bonds work.  They are more complex than a simple fixed term savings account.  If you dont understand the gotchas say so and we can explain further.

HL have a list of corporate bonds you can buy from them: https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds.  I would expect HL to be more comprehensive than other platforms, some of which dont sell bonds at all.

If you look down the list you will see an HSBC Bond with a Coupon of 5.375% and a current cost of £99.  That means that it will pay 5.375/99 X 100=5.43% annually until 4th November 2030 at which point you get £100 for each bond.  So you will also make a capital gain of about 1%.

 This is safe unless HSBC go bust.   You can make similar calculations for all the bonds listed.  However it only works out if you hold to maturity.  If you sell before then you may make a capital loss or even a higher gain.

A corporate bond fund has been suggested.  Yes it will remove the risk of getting wiped out by one failure but will bring in the much more likely though less catastrophic risk that you will make an unexpected capital loss when you sell since most of the underlying bonds in the fund will be some way from maturity.

When you follow the link to the HL website it says that the buy price is £1.01. If that is the case you would lose 1% at maturuty rather than gain 1%. Is there a reason that the buy price is showing £1.01?

Note there are 5 HSBC bonds shown there - "HSBC Bank plc", 5.375% coupon, maturing 22 August 2033 is priced at £101.925, while "HSBC Bank plc", also 5.375% coupon, maturing 4 November 2030 is priced at £99.00. You must always be careful about exactly which bond you're looking at.

I am aware of that. What I am pointing out is that when you click on the HSBC Bank one that matures in Nov 2030 and shows a buy price of £99 it takes you to the HL website that shows  the buy price as £101 as shown below

The mid here is 99. The institutional market will likely have a bid/ask spread of perhaps 0.5 for a high grade corp bond like this, so buy at 99.25, sell at 98.75. 
Therefore HL make 1.75% profit on every retail trade.

It's the market maker than makes money from the bid-offer spread. HL are not a market maker, they just connect their clients who want to trade with market makers through their platform.