Corporate bond returning 5%

Cus

george4064 said:

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.

I wasn't suggesting that HL are market makers, however the market maker will be selling at 99.25.  HL would either take the difference or share it with their broker who trades with the market maker based on some agreement to put through a certain volume regularly.  Either way, the retail client is paying someone(s)1.75% more than it actually cost OTC.  Significant premium.

EthicsGradient

Cus said:

george4064 said:

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.

I wasn't suggesting that HL are market makers, however the market maker will be selling at 99.25.  HL would either take the difference or share it with their broker who trades with the market maker based on some agreement to put through a certain volume regularly.  Either way, the retail client is paying someone(s)1.75% more than it actually cost OTC.  Significant premium.

The LSE also quotes the bid and offer prices as 97 and 101: HSBC BANK PLC 73BA Stock | London Stock Exchange
For something that seems pretty stable, it does seem a high spread - but then, the LSE only lists 2 trades for this entire week, so maybe it's a function of that.

Cus

EthicsGradient said:

Cus said:

george4064 said:

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.

I wasn't suggesting that HL are market makers, however the market maker will be selling at 99.25.  HL would either take the difference or share it with their broker who trades with the market maker based on some agreement to put through a certain volume regularly.  Either way, the retail client is paying someone(s)1.75% more than it actually cost OTC.  Significant premium.

The LSE also quotes the bid and offer prices as 97 and 101: HSBC BANK PLC 73BA Stock | London Stock Exchange
For something that seems pretty stable, it does seem a high spread - but then, the LSE only lists 2 trades for this entire week, so maybe it's a function of that.

I can see the approx 0.5 bid/offer spreads from multiple market makers on Bloombergs electronic trading venue, these are the prices offered to institutional investors who are trading otc (off exchange)
Why LSE has 97/101 I don't know but the vast majority of the weekly trading in this type of bond is not executed on an exchange.  Maybe there are retail protections in place that force execution elsewhere, don't know.

wmb194

Cus said:

EthicsGradient said:

Cus said:

george4064 said:

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.

I wasn't suggesting that HL are market makers, however the market maker will be selling at 99.25.  HL would either take the difference or share it with their broker who trades with the market maker based on some agreement to put through a certain volume regularly.  Either way, the retail client is paying someone(s)1.75% more than it actually cost OTC.  Significant premium.

The LSE also quotes the bid and offer prices as 97 and 101: HSBC BANK PLC 73BA Stock | London Stock Exchange
For something that seems pretty stable, it does seem a high spread - but then, the LSE only lists 2 trades for this entire week, so maybe it's a function of that.

I can see the approx 0.5 bid/offer spreads from multiple market makers on Bloombergs electronic trading venue, these are the prices offered to institutional investors who are trading otc (off exchange)
Why LSE has 97/101 I don't know but the vast majority of the weekly trading in this type of bond is not executed on an exchange.  Maybe there are retail protections in place that force execution elsewhere, don't know.

The LSE is just another venue and its trade data is patchy and indicative prices for bonds are often way out from what a broker will actually quote.

Linton

Almost all corporate bonds are traded by institutions outside the LSE. It is very smll business so the overheads of providing it at all could be very high.

Interestingly the II list of available corporate bonds is very different to HL's Many of them have the price given as zero which I guess means they are not actually available.  HLs list include a number of welI known companies whereas IIs has more obscure things like  New Brunswick Railway and a lot of presumably cash-strapped utilities - not very appealing!

 guess that the platforms may be making their own arrangements.