Try to understand corporate bond

daxu

Hi, thanks for everyone's reply. I am certainly not thinking of put all my money in bond, or single bond. 
Iast week I sold some share which is like 10% of my total sipp value. Just trying to understand bond, gilt etc and see if it is something I can understand and put some money in.

ColdIron

daxu said:

I sold some share which is like 10% of my total sipp value. Just trying to understand bond, gilt etc and see if it is something I can understand and put some money in.

Bonds and equities work in different ways and have very different objectives, one is not a substitute for the other

Beyond a vague and abstract idea of 'diversification' that you could 'put some money in', what need do you have that you think bonds would satisfy which equities do not? Go back to first principles

poseidon1

gm0 said:

This is a somewhat sophisticated investment.  Single bond.  Caution.  For a consumer investor. 

Your questions imply that you don't (or not yet) completely understand how bond markets work and clean and dirty prices.  No shame in that as it is obscure and jargon rich.

And how the act of holding a fund - which keeps buying and selling bonds while their prices vary. Is different from holding a single bond to term. Buying a cashflow - once.  (With the counterparty risk - can they pay - attached)

Single bond - coupon. coupon. coupon. nominal principal back at the end with price inbetween a lot less important to you.  Fund - daily unit price with coupons reinvested.  And varying in the resale market on capital values.  Driven by sentiment and central bank rates.

They are quite different things.   That suit different purposes.  The fund doesn't expose you entirely to a single company failing or restructuring its debt.  The single bond does.  The single bond doesn't expose you to prices and returns moving with interest rates as a fund buys/sells bonds in the fund maintaining its mix and average duration. 
*Provided you hold it to term as planned*  

The fund does expose you to central bank rate movements.  As in 2022.  Interest rate sharply up.  Bond fund  and bond resale prices sharply corrected down.  Some people bought a long time ago and it all comes out in the wash.  Went up and back down some.  Others bought at the top and are hurting. 

Someone sat with a bond holding it to term saw a change in possible value to sell it. But as not selling - it was insignificant to them.  The fund holder was hurt.  The bond holder was not.

Yet if you need the capital back early and sell a bond to do something else with the money - the single bond resale price will have varied with interest rates based on its duration - just as the fund does.

Purpose and timescale.  Desired return.  Mix of risks you are willing to take.  Willingness to hold to term.

Despite having been an ardent single company bond investor since 2012 ( as well as bond funds)  , I have to  agree gm0's summation.

I pursued single company bond investing after the London stock exchange introduced the Order Book for Retail Bonds ( ORB) in 2010. Prior to that small retail investors were effectively locked out of buying corporate bonds on the LSE due to minimum dealing sizes of £50,000 nominal, so very much the preserve of large institutional investors.

ORB was a game changer for retail investors, stockmarket companies who were so inclined ,  could offer new stockmarket listed bonds with a minimum £2,000 dealing size. The likes of Tesco and the LSE itself launched bonds in this space as well as many lesser corporate entities such as Paragon Bank. Coincidentally the Lloyds Bank bond mentioned by the OP was an original ORB issued back in 2010, and at its current dealing price there would be a small capital loss at redemption next year, although partly compensated by the 7.625% coupon for the remaining months to redemption.

However, my advantage in this area is the ability to understand company P & L accounts and balance sheets as well as  being able to determine where the corporate bond ranked as a preferred creditor in the event of the company going bust. Accordingly despite there being up to 170 different companies that issued bonds on ORBs, I was very selective and over the last 12 years probably only invested in 15 to 20 such companies.

The current situation for ORB, is that it is diminishing rapidly with only a very small handful of companies continuing to periodically offer new issues ( none I  would describe as household names), and older issues with maybe only 2 to 3 years left before redemption.

In my case in 2023 and 2024, I have had 4 such bonds redeem and return my original investment and now retain a small rump of just 2 remaining bonds.

I am now looking at new bonds in the institutional space ( minimum purchase £50k) as well as certain Government gilts, specialist bond Investment Trusts as well bond funds from the likes of Royal London.

In summary, there is a considerable knowledge base needed to invest in single company corporate bonds ( definitely possible to lose some capital if buying at too high a price), and even collective unit trust bond funds can contain traps for the unwary ( as mentioned by gm0).
The vast majority of retail investors should probably avoid retail bonds unless ; 1) it is a very large household name, 2) they can get in at issue or very near par,  3) are prepared to hold until redemption and not get too spooked if price periodically falls under circumstances other then potential business failure/ bond default.

Linton

daxu said:

wmb194 said:

daxu said:

Hi,
I sold some share in my HL SIPP and try to get bit safer investments due to my age (not retirement yet, but graddually getting there).

I am trying to understand corporate bond as I think for some bonds issued by giant company, it is unlikely to give me a negative shock.
for example, bond issued by Lloyds bank (e.g. XS0503834821). It will mature next April
wand with a bi-annual coupon frequency with redemption 22/April 2025.
Does this also have a Record date concept for coupon?
I googled online, I can find that it has a Coupon payment date 10/22/2024, so next Tuesday. If it has a record date, I guess it would be too late for me to buy Monday to receive coupon payment?

Many Thanks

Yes, they do have ex-coupon* dates and if the next one is next week you’ll have missed it. 

*Even though they pay interest they’re still usually referred to as ex-dividend dates. 

Sorry, mind if I ask another question? Is it right to say that the bonds issued by those giant companies are quite safe (e.g. one raised by TESCO, big banks etc)? As inflation is going down, I think the interest paid seems to be better than saving in a long run, say 5 year period.

Corporate bonds are safer than the corresponding shares in that they should be less volatile than shares and bond holders are higher up the priority list than shareholders for the distribution of assets should the company go bust. But in practice you may well find that a failed company does not have the assets to pay either.

On the other hand corporate bonds are much less safe than savings as, unless you buy at par or lower and wait until maturity, you could make a capital loss just as with gilts.

On the plus side you can get higher returns than from gilts or savings.

Only a minority of corporate bonds are readily available for small investors on the general market. Most are bought and sold in large quantities between institutional investors. So I use corporate bond funds rather than individual bonds to provide income. If you don’t want income perhaps equity or gilt funds could be a better choice.

spicer2

I got redundant in 2001 and had a nice package payout I thought corporate bond would be a good investment, 6 months later the twin towers went down the bond company stuck a withdraw penalty on them. Looking back I wished I had just left the money in a bolding society and went on holiday as my  new financial adviser ( my wife) suggested to me. we live and learn.

wmb194

spicer2 said:

I got redundant in 2001 and had a nice package payout I thought corporate bond would be a good investment, 6 months later the twin towers went down the bond company stuck a withdraw penalty on them. Looking back I wished I had just left the money in a bolding society and went on holiday as my  new financial adviser ( my wife) suggested to me. we live and learn.

Everything's easy with hindsight; what did you actually buy/invest in? A stockmarket listed corporate bond wouldn't have a withdrawal penalty. That was 23 years ago: how did things work out in the end? Did you get your money back?