Guaranteed Investment Bonds

caliston

The brochure says:

All investments will be registered in the name of HSBC Global Investor Services and your holding will be recorded and separately identified by us.

Does that mean that HSBC is the company who have to go bust for the investment to fail? HSBC is AA rated (by most of the agencies). It looks like HSBC are providing sub-custody here - what are the risk implications of this?

Apparently the underlying investment is preference shares on the Channel Islands Stock Exchange.

meester

caliston wrote: »

A couple more notes:

Based on daily outcomes:
Mean: gain of 20.7%
Standard deviation: gain of 16.2%
In other words, mean+stddev=gain of 36.9%, mean-stddev=gain of 4.5%. I'm not sure if that's comparable with the calculations of standard deviation for other funds.

What are you measuring? The gain of what over what period?

meester

caliston wrote: »

A bit late in the day, but I've done some finer-grained stats than those quoted upthread. Here I consider taking out a hypothetical bond on each day since 02/04/1984.

Interesting, as you note, the FTSE did fall 50% peak-trough at several points prior to the recent low of 3,287 on 12th March 2003.

That low would have spelled disaster for hypothetical investors on certain dates in the past. The surrounding closes were:

10th March 3,436
11th March 3,425.7
12th March 3,289
13th March 3,486.9

(After which it rose rapidly)

The effect of the 12th March would have been to nix any investments made at 6,578 and above. That level was first broached on November 25th 1999, and sustained until 4th January 2000. There were a couple more days in January 2000 above that level, plus about a week in March, plus June 2nd.

I'm not sure that matches with your graph?

caliston

You take out the hypothetical bond on a specific day in the past. You either get a positive gain of N*0.16 after N years or, after 6 years, break even (get your capital back) or make a loss (which is (endvalue-startvalue)/startvalue over the 6 years). I've taken the mean and standard deviation of these outcomes over the last 24 years, ignoring those days in which the outcome is not yet known.

I'm ignoring inflation, what you might get in the bank, or what happens to the FTSE100 apart from the specific sampling criteria specified by the bond. This is not a comparison with investing directly in the FTSE100 or any other market benchmarks.

caliston

meester, are you using closing values or lowest values for each daily sample? The plan says:

If, at any time during the life of the Plan, the Index has fallen below the Start Value by 50% or more, then you will lose 1% of your net investment for each 1% that the Final Value is below the Start Value.

I take 'any time' to mean sample the lowest values for this test (to be on the safe side). For everything else I'm using the closing values. The lowest value the FTSE100 took was 3277.5 on 12/03/03 (as it happens this minimum was the salient point for all the tests, but I did check it on a day-by-day basis in case any others applied)

The gory details of the days at which a loss is made are these:
(a date preceded by 'we' means there was no data because the day was a weekend, Bank Holiday etc, so I take the most recent data before then and I give that date preceded by the 'we').

TRACK: Startvalue(27/04/99)=6593.6 endvalue(25/04/05)=4864.9: lose -26.2178476%
TRACK: Startvalue(28/04/99)=6598.8 endvalue(26/04/05)=4845.5: lose -26.5699824%
TRACK: Startvalue(21/06/99)=6581.2 endvalue(we17/06/05)=5077.6: lose -22.8468972%
TRACK: Startvalue(05/07/99)=6592 endvalue(we01/07/05)=5161: lose -21.7081311%
TRACK: Startvalue(06/07/99)=6620.6 endvalue(04/07/05)=5184.3: lose -21.6944084%
TRACK: Startvalue(07/07/99)=6597.4 endvalue(05/07/05)=5190.1: lose -21.3311304%
TRACK: Startvalue(08/07/99)=6557.3 endvalue(06/07/05)=5229.6: lose -20.2476629%
TRACK: Startvalue(09/07/99)=6562.6 endvalue(07/07/05)=5158.3: lose -21.3985311%
TRACK: Startvalue(we09/07/99)=6562.6 endvalue(08/07/05)=5232.2: lose -20.272453%
TRACK: Startvalue(we09/07/99)=6562.6 endvalue(we08/07/05)=5232.2: lose -20.272453%
TRACK: Startvalue(15/07/99)=6575 endvalue(13/07/05)=5245.9: lose -20.2144487%
TRACK: Startvalue(16/07/99)=6563.2 endvalue(14/07/05)=5259.7: lose -19.8607387%
TRACK: Startvalue(we16/07/99)=6563.2 endvalue(15/07/05)=5230.8: lose -20.3010726%
TRACK: Startvalue(we16/07/99)=6563.2 endvalue(we15/07/05)=5230.8: lose -20.3010726%
TRACK: Startvalue(16/11/99)=6583 endvalue(14/11/05)=5470: lose -16.9071852%
TRACK: Startvalue(17/11/99)=6555.7 endvalue(15/11/05)=5439.6: lose -17.0248791%
TRACK: Startvalue(24/11/99)=6561.8 endvalue(22/11/05)=5517.2: lose -15.9194124%
TRACK: Startvalue(25/11/99)=6682.8 endvalue(23/11/05)=5531.7: lose -17.2248159%
TRACK: Startvalue(26/11/99)=6684.8 endvalue(24/11/05)=5511: lose -17.5592389%
TRACK: Startvalue(we26/11/99)=6684.8 endvalue(25/11/05)=5523.8: lose -17.3677597%
TRACK: Startvalue(we26/11/99)=6684.8 endvalue(we25/11/05)=5523.8: lose -17.3677597%
TRACK: Startvalue(29/11/99)=6692.3 endvalue(we25/11/05)=5523.8: lose -17.4603649%
TRACK: Startvalue(30/11/99)=6597.2 endvalue(28/11/05)=5477.4: lose -16.9738677%
TRACK: Startvalue(01/12/99)=6646 endvalue(29/11/05)=5491: lose -17.3788745%
TRACK: Startvalue(02/12/99)=6653.7 endvalue(30/11/05)=5423.2: lose -18.4934698%
TRACK: Startvalue(03/12/99)=6742.2 endvalue(01/12/05)=5486.1: lose -18.6304174%
TRACK: Startvalue(we03/12/99)=6742.2 endvalue(02/12/05)=5528.1: lose -18.0074753%
TRACK: Startvalue(we03/12/99)=6742.2 endvalue(we02/12/05)=5528.1: lose -18.0074753%
TRACK: Startvalue(06/12/99)=6694 endvalue(we02/12/05)=5528.1: lose -17.4170899%
TRACK: Startvalue(07/12/99)=6660.9 endvalue(05/12/05)=5510.4: lose -17.2724407%
TRACK: Startvalue(08/12/99)=6619.4 endvalue(06/12/05)=5538.8: lose -16.3247424%
TRACK: Startvalue(09/12/99)=6680.8 endvalue(07/12/05)=5528.8: lose -17.2434439%
TRACK: Startvalue(10/12/99)=6739.5 endvalue(08/12/05)=5531.1: lose -17.9301135%
TRACK: Startvalue(we10/12/99)=6739.5 endvalue(09/12/05)=5517.4: lose -18.1333927%
TRACK: Startvalue(we10/12/99)=6739.5 endvalue(we09/12/05)=5517.4: lose -18.1333927%
TRACK: Startvalue(13/12/99)=6710.7 endvalue(we09/12/05)=5517.4: lose -17.7820496%
TRACK: Startvalue(14/12/99)=6702.1 endvalue(12/12/05)=5501.5: lose -17.9137882%
TRACK: Startvalue(15/12/99)=6633.8 endvalue(13/12/05)=5507.2: lose -16.9827248%
TRACK: Startvalue(16/12/99)=6672 endvalue(14/12/05)=5521.1: lose -17.2497002%
TRACK: Startvalue(17/12/99)=6724.6 endvalue(15/12/05)=5495.3: lose -18.2806412%
TRACK: Startvalue(we17/12/99)=6724.6 endvalue(16/12/05)=5531.6: lose -17.7408322%
TRACK: Startvalue(we17/12/99)=6724.6 endvalue(we16/12/05)=5531.6: lose -17.7408322%
TRACK: Startvalue(20/12/99)=6731.2 endvalue(we16/12/05)=5531.6: lose -17.821488%
TRACK: Startvalue(21/12/99)=6707.5 endvalue(19/12/05)=5539.8: lose -17.4088707%
TRACK: Startvalue(22/12/99)=6728.6 endvalue(20/12/05)=5547.9: lose -17.5474839%
TRACK: Startvalue(23/12/99)=6776.8 endvalue(21/12/05)=5587.4: lose -17.5510565%
TRACK: Startvalue(24/12/99)=6806.5 endvalue(22/12/05)=5597: lose -17.7697789%
TRACK: Startvalue(we24/12/99)=6806.5 endvalue(23/12/05)=5595.4: lose -17.7932858%
TRACK: Startvalue(we24/12/99)=6806.5 endvalue(we23/12/05)=5595.4: lose -17.7932858%
TRACK: Startvalue(we24/12/99)=6806.5 endvalue(we23/12/05)=5595.4: lose -17.7932858%
TRACK: Startvalue(we24/12/99)=6806.5 endvalue(we23/12/05)=5595.4: lose -17.7932858%
TRACK: Startvalue(29/12/99)=6835.9 endvalue(we23/12/05)=5595.4: lose -18.1468424%
TRACK: Startvalue(30/12/99)=6930.2 endvalue(28/12/05)=5622.8: lose -18.8652564%
TRACK: Startvalue(we30/12/99)=6930.2 endvalue(29/12/05)=5638.3: lose -18.6415976%
TRACK: Startvalue(we30/12/99)=6930.2 endvalue(30/12/05)=5618.8: lose -18.9229748%
TRACK: Startvalue(we30/12/99)=6930.2 endvalue(we30/12/05)=5618.8: lose -18.9229748%
TRACK: Startvalue(we30/12/99)=6930.2 endvalue(we30/12/05)=5618.8: lose -18.9229748%
TRACK: Startvalue(04/01/00)=6662.9 endvalue(we30/12/05)=5618.8: lose -15.6703537%
TRACK: Startvalue(10/01/00)=6607.7 endvalue(we06/01/06)=5731.8: lose -13.2557471%
TRACK: Startvalue(14/01/00)=6658.2 endvalue(12/01/06)=5735.1: lose -13.8641074%
TRACK: Startvalue(we14/01/00)=6658.2 endvalue(13/01/06)=5711: lose -14.2260671%
TRACK: Startvalue(we14/01/00)=6658.2 endvalue(we13/01/06)=5711: lose -14.2260671%
TRACK: Startvalue(17/01/00)=6669.5 endvalue(we13/01/06)=5711: lose -14.3713922%
TRACK: Startvalue(06/03/00)=6567.8 endvalue(we03/03/06)=5858.7: lose -10.7966138%
TRACK: Startvalue(10/03/00)=6568.7 endvalue(09/03/06)=5855.9: lose -10.8514622%
TRACK: Startvalue(we10/03/00)=6568.7 endvalue(10/03/06)=5907.9: lose -10.0598292%
TRACK: Startvalue(we10/03/00)=6568.7 endvalue(we10/03/06)=5907.9: lose -10.0598292%
TRACK: Startvalue(16/03/00)=6557.2 endvalue(15/03/06)=5965.1: lose -9.0297688%
TRACK: Startvalue(17/03/00)=6558 endvalue(16/03/06)=5993.2: lose -8.61238182%
TRACK: Startvalue(we17/03/00)=6558 endvalue(17/03/06)=5999.4: lose -8.51784081%
TRACK: Startvalue(we17/03/00)=6558 endvalue(we17/03/06)=5999.4: lose -8.51784081%
TRACK: Startvalue(20/03/00)=6626.5 endvalue(we17/03/06)=5999.4: lose -9.46351769%
TRACK: Startvalue(21/03/00)=6617.9 endvalue(20/03/06)=5991.7: lose -9.46221611%
TRACK: Startvalue(22/03/00)=6609.6 endvalue(21/03/06)=5991.3: lose -9.35457516%
TRACK: Startvalue(23/03/00)=6594.6 endvalue(22/03/06)=6007.5: lose -8.9027386%
TRACK: Startvalue(24/03/00)=6738.5 endvalue(23/03/06)=5990.1: lose -11.1063293%
TRACK: Startvalue(we24/03/00)=6738.5 endvalue(24/03/06)=6036.3: lose -10.4207168%
TRACK: Startvalue(we24/03/00)=6738.5 endvalue(we24/03/06)=6036.3: lose -10.4207168%
TRACK: Startvalue(27/03/00)=6687.2 endvalue(we24/03/06)=6036.3: lose -9.73352076%
TRACK: Startvalue(28/03/00)=6650.1 endvalue(27/03/06)=5972.2: lose -10.1938317%
TRACK: Startvalue(29/03/00)=6598.8 endvalue(28/03/06)=5935.7: lose -10.0487968%
TRACK: Startvalue(07/04/00)=6569.9 endvalue(06/04/06)=6045.7: lose -7.97881246%
TRACK: Startvalue(we07/04/00)=6569.9 endvalue(07/04/06)=6026.1: lose -8.27714273%
TRACK: Startvalue(we07/04/00)=6569.9 endvalue(we07/04/06)=6026.1: lose -8.27714273%
TRACK: Startvalue(02/06/00)=6626.4 endvalue(01/06/06)=5749.7: lose -13.2304117%
TRACK: Startvalue(we02/06/00)=6626.4 endvalue(02/06/06)=5764.6: lose -13.0055535%
TRACK: Startvalue(we02/06/00)=6626.4 endvalue(we02/06/06)=5764.6: lose -13.0055535%
TRACK: Startvalue(22/08/00)=6584.8 endvalue(21/08/06)=5915.2: lose -10.1688738%
TRACK: Startvalue(23/08/00)=6566.2 endvalue(22/08/06)=5902.6: lose -10.106302%
TRACK: Startvalue(24/08/00)=6557 endvalue(23/08/06)=5860: lose -10.6298612%
TRACK: Startvalue(25/08/00)=6563.7 endvalue(24/08/06)=5869.1: lose -10.5824459%
TRACK: Startvalue(we25/08/00)=6563.7 endvalue(25/08/06)=5878.6: lose -10.4377104%
TRACK: Startvalue(we25/08/00)=6563.7 endvalue(we25/08/06)=5878.6: lose -10.4377104%
TRACK: Startvalue(we25/08/00)=6563.7 endvalue(we25/08/06)=5878.6: lose -10.4377104%
TRACK: Startvalue(29/08/00)=6586.3 endvalue(we25/08/06)=5878.6: lose -10.7450314%
TRACK: Startvalue(30/08/00)=6615.1 endvalue(29/08/06)=5888.3: lose -10.9869843%
TRACK: Startvalue(31/08/00)=6672.7 endvalue(30/08/06)=5929.3: lose -11.1409175%
TRACK: Startvalue(01/09/00)=6795 endvalue(31/08/06)=5906.1: lose -13.0816777%
TRACK: Startvalue(we01/09/00)=6795 endvalue(01/09/06)=5949.1: lose -12.4488595%
TRACK: Startvalue(we01/09/00)=6795 endvalue(we01/09/06)=5949.1: lose -12.4488595%
TRACK: Startvalue(04/09/00)=6798.1 endvalue(we01/09/06)=5949.1: lose -12.4887836%
TRACK: Startvalue(05/09/00)=6752.5 endvalue(04/09/06)=5986.6: lose -11.3424658%
TRACK: Startvalue(06/09/00)=6694.7 endvalue(05/09/06)=5981.7: lose -10.6502158%
TRACK: Startvalue(07/09/00)=6689.2 endvalue(06/09/06)=5929.3: lose -11.3601029%
TRACK: Startvalue(08/09/00)=6600.7 endvalue(07/09/06)=5858.1: lose -11.2503219%
TRACK: Startvalue(we08/09/00)=6600.7 endvalue(08/09/06)=5879.3: lose -10.9291439%
TRACK: Startvalue(we08/09/00)=6600.7 endvalue(we08/09/06)=5879.3: lose -10.9291439%
TRACK: Startvalue(11/09/00)=6582 endvalue(we08/09/06)=5879.3: lose -10.6760863%
TRACK: Startvalue(12/09/00)=6555.5 endvalue(11/09/06)=5850.8: lose -10.7497521%
TRACK: Startvalue(14/09/00)=6555.5 endvalue(13/09/06)=5892.2: lose -10.1182213%

meester

caliston wrote: »

You take out the hypothetical bond on a specific day in the past. You either get a positive gain of N*0.16 after N years or, after 6 years, break even (get your capital back) or make a loss (which is (endvalue-startvalue)/startvalue over the 6 years). I've taken the mean and standard deviation of these outcomes over the last 24 years, ignoring those days in which the outcome is not yet known.

I'm ignoring inflation, what you might get in the bank, or what happens to the FTSE100 apart from the specific sampling criteria specified by the bond. This is not a comparison with investing directly in the FTSE100 or any other market benchmarks.

I don't think these figures are yet meaningful.

The possible outcomes are:

Return any number less than 1 after 6 years
Return 1 after 6 years
Return 1.16 after 1 year
Return 1.32 after 2 years
Return 1.48 after 3 years
Return 1.64 after 4 years
Return 1.8 after 5 years
Return 1.96 after 6 years

The problem is, clearly, that the number of years in the terms is not fixed.

If you invest in this hypothetical bond four times, and one one of those occasions the index falls to 50% of its start value, the return is as follows:

1.16/1; 1.32/2; 0.8/6; 1.16/1

Then your total investment terms is 10 years.

And your final return is 1.16 * 1.32 * 0.8 * 1.16 = 1.4209536

This number is not meaningful on its own, because the money was tied up for a total of 10 years.

The average return (i.e. the geometric mean) therefore, is 1.4209536 ^ (1/10) = 1.03575

This is not the same as the simple arithmetic mean of the annualised returns, which is:

1.16, 1.16, 1.1489 (2 years), .963 (six years). The mean of this is 1.0398 - a fall in value always reduces the geometric mean more than it does the arithmetic mean.

Anyway, the meaningful figure is the geometric mean, which you should calculate using the following columns in the spreadsheet:

End-of-term Return | Years to maturity
(e.g., 1.96) 6

You then add an annualized return columns, based on the yearth root of the End of Term return.

You can then find the geometric mean of each possible start date using the number of years to maturity as the frequency of the occurrence of the calculated annualized return.

This then gives you the mean annual return.

I would be interested to know this figure.

meester

As a guesstimate, caliston lists 220 days where there was a 50% fall. I guess there are 250 trading days in a year. So 1984-2003 is 5,000 days. That is then 4.4% of the total where you would have suffered the loss. This is instead of losing zero, you would lose, at a guess, around 15% on average.

So I guess this reduces my quoted profit figures by about 0.15 * 0.044 = 0.66%. Not too bad.

caliston

meester wrote: »

Anyway, the meaningful figure is the geometric mean, which you should calculate using the following columns in the spreadsheet:

End-of-term Return | Years to maturity
(e.g., 1.96) 6

You then add an annualized return columns, based on the yearth root of the End of Term return.

You can then find the geometric mean of each possible start date using the number of years to maturity as the frequency of the occurrence of the calculated annualized return.

I don't quite understand this bit. Take some example days:

Day we09/01/87(1107) close 1752
Testing y1(11/01/88) vy1=1760.2 diff 8.2
Annualised return 1.16 after 1 year

Day 12/01/87(1108) close 1755.2
Testing y1(12/01/88) vy1=1739.2 diff -16
Testing y2(11/01/89) vy2=1834.1 diff 78.9
Annualised return 1.14891253 after 2 years

Day 11/05/87(1227) close 2163.3
Testing y1(10/05/88) vy1=1792.6 diff -370.7
Testing y2(10/05/89) vy2=2117 diff -46.3
Testing y3(10/05/90) vy3=2157 diff -6.3
Testing y4(10/05/91) vy4=2524.3 diff 361
Annualised return 1.13164696 after 4 years

Day 27/04/99(5596) close 6593.6
Testing y1(26/04/00) vy1=6256.5 diff -337.1
Testing y2(26/04/01) vy2=5868.3 diff -725.3
Testing y3(26/04/02) vy3=5159 diff -1434.6
Testing y4(we25/04/03) vy4=3870.2 diff -2723.4
Testing y5(we23/04/04) vy5=4570 diff -2023.6
Testing y6(25/04/05) vy6=4864.9 diff -1728.7
After 6 years no win, dates <50%:
12/03/03 3277.5
13/03/03 3287
Annual return 0.948112237 after 6 years

I've got a table that looks like this:
Day 1107, annualised return 1.16
Day 1108, annualised return 1.14891253 ie 1.32^(1/2)
Day 1227, annualised return 1.13164696 ie 1.64^(1/4)
Day 5596, annualised return 0.948112237 ie (1+(4864.9-6593.6)/4864.9))^(1/6)

Do I just multiply up these N numbers and take the Nth root? You seemed to be suggesting weighting the longer terms in the geometric mean, but that would be just the same as not taking the yearth root initially.

Joey122

People should realise that if the index is > 50% and < 100% after 6 years you get no growth!

This is very important and further more there is no compounding taking place.

However these products are very good as they do pay out tax free (using CGT)

I have always wondered whether there is a product out there which ill pay a guaranteed rate of return like the bank would but structure it so it us paid as growth instead of income.

This would a top seller IMHO.

Any one know of one?

caliston

Joey122 wrote: »

People should realise that if the index is > 50% and < 100% after 6 years you get no growth!

This is very important and further more there is no compounding taking place.

Indeed, which is a loss in real terms, but if you'd invested in the FTSE100 directly you'd lose some of your original stake (with some compensation from dividends). It really should be compared with that sort of investment: it's not a savings product.

You're right about compounding - that reduces the return after 6 years to be 11.9% annually. This also doesn't pay dividends, but on the other hand there are no annual charges.

I have always wondered whether there is a product out there which ill pay a guaranteed rate of return like the bank would but structure it so it us paid as growth instead of income.

Could you get a money market ETF? But I suspect the Chancellor would have plugged this little loophole.