Bonds questions

Nuggy96

I've always either saved my money in regular savers/high interest savings or invested in ETFs (World trackers or S&P 500). However, I've started looking in corporate bonds and was curious what the risks are and whether I've understood everything.

For example Vodafone are offering (XS0181816652) 5.625% on this bond with a maturity of 4th December 2025. I understand that if I buy £4000 worth, on maturity I would get a coupon worth 5.625% of my £4k (£225) and my initial £4k investment.

The potential risks are:

 that vodafone could go bust (They're quite a big company, will they go bust by December? highly unlikely although anything is possible).

Bond price could go down but they have to pay the face value £4k back on maturity right?

Am I missing something super obvious or a risk somewhere?

Thanks in advance

Newbie_John

accrued interests

as only 4 months left - whoever sells you the bond will receive "interests" for 8 months - you will get about £80 only

also have a look at some funds that invest in corporate bonds like these cases with higher yield (10% for the past year):
Legal & General Active Global High Yield
Liontrust GF High Yield Bond
Royal London Sterling Extra Yield Bond

same issues remain here, although they are spreaded

Nuggy96

Newbie_John said:

accrued interests

as only 4 months left - whoever sells you the bond will receive "interests" for 8 months - you will get about £80 only

also have a look at some funds that invest in corporate bonds like these cases with higher yield (10% for the past year):
Legal & General Active Global High Yield
Liontrust GF High Yield Bond
Royal London Sterling Extra Yield Bond

same issues remain here, although they are spreaded

Oh interesting, that's good to know, the websites, I'd looked at hadn't accounted for that. Still 5.625% is quite good even for the 4 months they have my money. Plus looks very little risk?

Notepad_Phil

Nuggy96 said:

For example Vodafone are offering (XS0181816652) 5.625% on this bond with a maturity of 4th December 2025. I understand that if I buy £4000 worth, on maturity I would get a coupon worth 5.625% of my £4k (£225) and my initial £4k investment.
...

I'm not an expert on corporate bonds but I assume you won't be buying at the price it was originally issued at and that price is what the 5.625% interest rate will be based on. Looking at HL it seems you'll be buying at something like £101.35 so from some quick maths and assuming the par price was £100 then that's about 5.55%.

And just spotted your mention of 'they'll pay back £4000', again not an expert, but no I don't think they will. You'll have bought slightly less than 40 units of that bond, and I'd assume you'll just get back £100 x units you buy, so a bit less than £4000.

kempiejon

For example Vodafone are offering (XS0181816652) 5.625% on this bond with a maturity of 4th December 2025. I understand that if I buy £4000 worth, on maturity I would get a coupon worth 5.625% of my £4k (£225) and my initial £4k investment.

Are those bond for sale at £1 though? Please check my maths but depending on the size of your buy after spread and commission it has cost you about £1.02 to buy £1. There's a month or so of accrued interest is owed to the current holder and maturity is 3.5 months out so you'd get what 1/3rd of 5.625%. It might be low risk buy I can't see much profit. Is it better than a good cash account.

aroominyork

They are trading above par, ie above the £100 you will receive on maturity. The LSE shows the last trade was at £100.60 so based on that you will lose just under 0.6% of your money between purchase and maturity. 

Nuggy96

ahh yes, done all the calcs it's around 3.6% "annual profit" never mind! Thanks all

Linton

Unlike gilts, if you want to invest in corporate bonds I suggest you look at funds rather then individual bonds.

 - Very few corporate bonds are available to private investors on the standard platforms, most are only traded directly  in large quantities between the institutions. For example AJBell only offer 34 UK corporate bonds in total many of which are obscure.  This makes diversification difficult.  Also the smal amount traded leads to higher bid/offer spreads than with equivalent shares.  Hence my recommendation for corporate bond funds. 

 - Corporate bond funds can be good if you want long term income, but I would not recommend them for total return since their capital return is zero (all other things being equal) whereas equity income can provide both growth and dividend rates comparable with lower risk corporate bonds. 

aroominyork

Linton said:

 - Corporate bond funds can be good if you want long term income, but I would not recommend them for total return since their capital return is zero (all other things being equal) whereas equity income can provide both growth and dividend rates comparable with lower risk corporate bonds. 

Equity income might distribute dividends of 4.5%-5%, much like the income from an investment grade corporate bond fund, but the similarity ends there. Equity income funds are just as volatile as other equities so you have to be prepared for a 50% downturn. And with bonds all other things rarely are equal, as we saw in 2022 when Sterling corporate bond index funds fell over 25%.

poseidon1

I am a buyer of corporate bonds but mostly those traded on the Order BooK of Retail Bonds ( ORBs ).

My preference had been for new issues ( where one acquires at par), with yields at 6% +.

However new ORBs issues have declined to near zero, and the few that still trade are often priced  well above the nominal yield therefore leading to capital losses on redemption.

Individual corporate bonds are considered complex investments which investment platforms insist an investor takes and pass a questionnaire before being allowed to trade.

Investors new to bond investing should probably stick with bond funds as suggested by others, but note the risks as noted by @aroominyork.

There also one or two quoted investment trusts that also invests solely in bonds, but they constitute a whole other level of complexity, risk and reward, so if anything are even less suitable for the untutored investor, compared  to individual corporate bonds.

aroominyork

poseidon1 said:

There also one or two quoted investment trusts that also invests solely in bonds, but they constitute a whole other level of complexity, risk and reward, so if anything are even less suitable for the untutored investor, compared  to individual corporate bonds.

What are these IT? Doubt I'd ever invest in them but I'd like to see their strategies.