Simple Question regarding Bonds

Neversurrender

Although I'm not quite ready to invest in bonds just yet, I'm trying to establish a plan for later.

Not completely understanding how Bonds work yet  but think the penny might be starting to drop

If I invest in a bond for my sipp portfolio, and choose for example a bond fund which is made up of government and treasury gilts, and choose a 5 year plan.

If the coupon is say 4.7%

Am I right in thinking that if I invest say £10,000 it will make 4.7% per year (£470)

Then after 5 years I would have a guaranteed amount of £470 x 5 plus my original £10,000?

What I get confused with is when you look at the performance graphs of these funds where you see the performance go up and down, my confusion is if it's fixed would I still get my original investment plus 

4.7% guaranteed, regardless  of these performance figures over that 5 year term.

Sorry for what must be a very basic question for some of you pro's.

Thanks

wmb194

Neversurrender said:

Although I'm not quite ready to invest in bonds just yet, I'm trying to establish a plan for later.

Not completely understanding how Bonds work yet  but think the penny might be starting to drop

If I invest in a bond for my sipp portfolio, and choose for example a bond fund which is made up of government and treasury gilts, and choose a 5 year plan.

If the coupon is say 4.7%

Am I right in thinking that if I invest say £10,000 it will make 4.7% per year (£470)

Then after 5 years I would have a guaranteed amount of £470 x 5 plus my original £10,000?

What I get confused with is when you look at the performance graphs of these funds where you see the performance go up and down, my confusion is if it's fixed would I still get my original investment plus 

4.7% guaranteed, regardless  of these performance figures over that 5 year term.

Sorry for what must be a very basic question for some of you pro's.

Thanks

The return on a fund isn't guaranteed, either the interest it pays or its value at the end of a term, as it'll keep reinvesting the proceeds of maturing bonds. To achieve a fixed return you'd need to own e.g., an individual gilt and hold it to maturity. T30 has roughly five years to run and appears to be yielding about 4% YTM. If you search the forum you'll find threads on gilts. (T30 is the ticker on the LSE.)



https://www.yieldgimp.com/

Neversurrender

@wmb many thanks for your reply.

Sorry my terminology may not have been correct when I called it a fund.

I was looking at the T30 on AJ Bell

So is that an individual gilt rather than a fund  because that was what I meant, and are we saying that WOULD be guaranteed?

Thanks

DRS1

T30's price is over 100 so you will make a capital loss on maturity (ie you would not get all £10k back).

Neversurrender

DRS1 said:

T30's price is over 100 so you will make a capital loss on maturity (ie you would not get all £10k back).

Thanks, then it sounds like some Bonds are not for people who want to protect their money I guess

So how would I go about finding one that will give me back what I put in plus fixed coupon rate please?

Newbie_John

Neversurrender said:

DRS1 said:

T30's price is over 100 so you will make a capital loss on maturity (ie you would not get all £10k back).

Thanks, then it sounds like some Bonds are not for people who want to protect their money I guess

So how would I go about finding one that will give me back what I put in plus fixed coupon rate please?

The link above and first column with %

It literally returns money two ways - one through change of its price - capital gains (or loss like in t30) and coupons paid over time.

For SIPP it doesn't matter which way you choose, but if you had £100k outside of SIPP then you would go for one with low % like 0.125% as you only pay tax on coupon (not on capital gain - and the price will end at 100 on maturity).

wmb194

Neversurrender said:

DRS1 said:

T30's price is over 100 so you will make a capital loss on maturity (ie you would not get all £10k back).

Thanks, then it sounds like some Bonds are not for people who want to protect their money I guess

So how would I go about finding one that will give me back what I put in plus fixed coupon rate please?

You're still protecting* your money, you need to look at the overall return, principal plus interest, rather than just the principal. If you look at the table above it's the gross redemption yield that's the guide.

If you're solely focused on the principal look to buy bonds that are trading below par, 100p. E.g., TG30. As they're currently priced in the market, the overall return will be slightly lower than T30, though, 3.89% p.a. vs 4.03% p.a.. With this one the bulk of your return will be at maturity rather than through regular interest payments over the remaining term.

*In nominal terms.

Neversurrender

Thanks guys for your kind help in explaining this.

DRS1

If you are going to be looking at yieldgimp, you'll be pleased to know that the information is easier to read during the week.

Neversurrender

DRS1 said:

If you are going to be looking at yieldgimp, you'll be pleased to know that the information is easier to read during the week.

Oh, that's a relief 😊

Thanks

OldScientist

You're almost right - it is the yield that is approximately equal to the total return and not the coupon*.

From the cashflow point of view you are also almost right.

Since it is mentioned elsewhere in the thread, take T30 as an example.

It has a coupon of 4.375% and had a clean price of 101.53 and yield to maturity of 4.03% at the end of play on 4th April. The 'dirty' price (which includes the accumulated interest and is the price you would pay) was 101.53+1.05 (the 1.05 being the accrued interest - see yieldgimp), i.e., 102.58.

Assuming a £100 par price and ignoring spreads and assuming no reinvestment, £100 capital would purchase 0.9748 gilts giving cashflows of

3 Sept 2025   £2.13 (0.9748*4.375/2) [in reality, the coupon in Sept will be different to this because, AFAIK, no coupon was paid on 3 March 2025 because the gilt was only issued in January]
3 March 2026 £2.13
3 Sep 2026 £2.13
[...]
3 March 2030 £2.13+£97.48=£99.61

Obviously, reinvesting the coupons would gradually increase the number of gilts held.

* yield is only approximately equal to total return because the price the coupons will be reinvested at is unknown and because the coupons are issued semi-annually and not annually.