Bond Yields Long term

leosayer

Pat38493 said:

Secret2ndAccount said:

Cus said:

Isn't the 5% just an indication that inflation expectations are at that level? So you lock in 5% but everything costs 5% more every year. When the risk free rate was 2% then everything went up 2% a year. I guess the equity allocation may provide more than inflation, whatever it is.

No. 30 year Index Linked gilts are paying about 2.5% while conventional gilts are at 5.5%. So the market's guess at future inflation is 3%.  The rest is a return on investment - payment for getting to use your money for 30 years.

So I could put say £200K into those 30 years gilts, and I would receive £11K per year for 30 years, and then I would get the capital back at the end (albeit at the nominal value)?

Not quite. It depends on the coupon payment.

One example is T56 ie. 5.375% Treasury Gilt 2056.
The maturity date is 31-Jan-2056. 
With your £200k investment, you buy the gilt at the current price of £95.39 which gives you 2,096 units of £100.
This equates to a maturity value of £209,600.

Every 6 months you recieve an interest payment of 5.375% x 209,600 / 2 = £5,633.

Edited to add - this formula gives you the yield to maturity in excel for the above: =yield(today(),DATE(2056,1,31),5.375%,95.39,100,2)

Secret2ndAccount

Pat38493 said:   So I could put say £200K into those 30 years gilts, and I would receive £11K per year for 30 years, and then I would get the capital back at the end (albeit at the nominal value)?

More or less / sort of...

Closest to what you are suggesting would be T56
Price today £96.65.   Coupon 5.375%
200k buys 200,000/96.65 = 2069 units
Annually, 2069 * 5.375% = £11,120
31 Jan 2056 you get back £206,900

T54 is priced today at £82.44 and pays a coupon of 4.375%.  So if you put 200k into T54, you would receive £10,640 each year in interest (fixed, not compounding), then 242k back on 31 Jul 2054

Are you sure you want to lock up the money for 30 years without knowing what inflation, or even interest rates will be? If you want to sell at any time, that shouldn't be a problem, but you could get back less than you put in. A year ago, T54 was selling right at £100.
There are also variants that pay a lower interest rate (e.g. 1.5%) but a much higher capital return. The interest is potentially taxable depending on your other interest/income. The capital gain is not. Many maturity dates and coupons to choose from.

DingDongDan

Secret2ndAccount said:

There are also variants that pay a lower interest rate (e.g. 1.5%) but a much higher capital return. 

I am learning a good lot about gilts, something I had 0 clue just weeks ago -thanks.

Could you, perhaps, kindly provide a current existing example of the 1.5% type-of with a much higher capital return?

MK62

DingDongDan said:

Secret2ndAccount said:

There are also variants that pay a lower interest rate (e.g. 1.5%) but a much higher capital return. 

I am learning a good lot about gilts, something I had 0 clue just weeks ago -thanks.

Could you, perhaps, kindly provide a current existing example of the 1.5% type-of with a much higher capital return?

TR54 is one example.......coupon is much lower at 1.625%, current dirty price is £44.12.......

Secret2ndAccount

Be careful. If you buy TR54 for just £44.12 then your return is much more than 1.625%. It would be 1.625% if you paid £100. At £44.12 your annual yield is 3.7%
I was thinking of TG50  Today's price £34.52 Coupon: 0.625% (at £100). Effective yield 1.8%, then triple your original investment at maturity.
Shorter term, there's TG31.  £79.90 and 0.2%. That equates to 0.25% then a 25% boost, tax free, in 6 years.

DingDongDan

MK62 said:

DingDongDan said:

Secret2ndAccount said:

There are also variants that pay a lower interest rate (e.g. 1.5%) but a much higher capital return. 

I am learning a good lot about gilts, something I had 0 clue just weeks ago -thanks.

Could you, perhaps, kindly provide a current existing example of the 1.5% type-of with a much higher capital return?

TR54 is one example.......coupon is much lower at 1.625%, current dirty price is £44.12.......

Fascinating, thanks -and with your kind example now I can see that:

TR54 being priced today at £44.12 and paying a coupon of 1.625%:
If you put 200k into TR54, I want to believe that you would receive £3,250 each year in interest (fixed, not compounding), then, though, £311,760 back on 22/10/2054?

Secret2ndAccount

Your post crossed with my post. but your calculations are a bit off.
200k into something that costs £44.12 buys you 4533 units. Each unit pays £1.62½ per year, so your annual income is £7366.  At the end you get £453,300

DingDongDan

Indeed our posts crossed, sorry.

As a rookie, I was calculating (I didn’t know) units per 100, although I can see now you get units based on the dirty price -beautiful, and thanks for the clarification!

Pat38493

Secret2ndAccount said:

Pat38493 said:   So I could put say £200K into those 30 years gilts, and I would receive £11K per year for 30 years, and then I would get the capital back at the end (albeit at the nominal value)?

More or less / sort of...

Closest to what you are suggesting would be T56
Price today £96.65.   Coupon 5.375%
200k buys 200,000/96.65 = 2069 units
Annually, 2069 * 5.375% = £11,120
31 Jan 2056 you get back £206,900

T54 is priced today at £82.44 and pays a coupon of 4.375%.  So if you put 200k into T54, you would receive £10,640 each year in interest (fixed, not compounding), then 242k back on 31 Jul 2054

Are you sure you want to lock up the money for 30 years without knowing what inflation, or even interest rates will be? If you want to sell at any time, that shouldn't be a problem, but you could get back less than you put in. A year ago, T54 was selling right at £100.
There are also variants that pay a lower interest rate (e.g. 1.5%) but a much higher capital return. The interest is potentially taxable depending on your other interest/income. The capital gain is not. Many maturity dates and coupons to choose from.

No I don't really want to lock the money up (at least not at the moment) - I am just curious and I might look into this for future use - for the next couple of years there are too many variables in my planning to do something like this.

However - the point you make about the interest being fixed rather than compounding - doesn't that mean you have to be careful about comparing it to other investments - another investment with compounding interest but a lower rate would give the same or better result?

Secret2ndAccount

Well that depends on what you do with the coupon/interest payments. If you use them to buy more bonds you have compound interest. Just the same as a savings account: you can take the interest payments out, or leave them in the account to grow the principal.
If you are invested in a distributing fund, you have to decide what to do with the divdends. If you are using an acc fund, you are compounding. There's no right or wrong - you need to understand what you are doing.