Warning: Long!
Melanie wrote:Hi all,
First of all, I may appear somewhat less knowledgeable than I did yesterday, as this is the 'real me'! My husband was posting on my behalf and he has a better grasp on the idea of bonds than I have, so apologies if it seems that I'm asking more basic questions!
Hi Melanie, first can I say I love your attitude. You are persistent, you really want to understand how these things work and are willing to go to actual data and do a bit of maths. I think you're going to make a lot of money from investing.
All investments are a variety of bond so you may as well get your head around the terminology and maths. If you agree, go to a really good text book like this one by british author Moorad Choudhry.
https://www.amazon.co.uk/Introduction-B ... 47068724X/Just because you understand bonds doesn't mean they will be a good invesment. There are times when buying certain bonds is not a good idea. If you have a poor psychological aptitude to investing and keep buying and selling at the wrong time despite what your logical head tells you, clearly the result will be sub-optimal. So don't get bogged down in the minutuiae but develop a sense of the broader context, a kind of investor's peripheral vision. One principle that will crop up over and over is to have a diverse portfolio -- don't put all your money into preference shares!
I'm going to walk you through what I am thinking and doing to research this bond and answer some of the questions you might have.
Here goes, my stream of consciousness! Maybe follow though the steps yourself...
-First, you have cited a stockbroker's website as a source of some of your information. Great start, but I realise this is a secondary source -- HL are just compiling others' data in a form acceptable for their clients. The categories they use may be funny, there could even be mistakes. So what is useful here and where to go next? Well the most useful thing is the ISIN number. This is a unique identifier for all listed securities and any web site worth its salt quotes this number.
-What I want to get to is most importantly the Prospectus or Listing Particulars or Contract for this security, then take a look at the issuer, especially balance sheet and profitability, maybe get any idea of recent pricing and trading.
-So the ISIN 'XS0089553282" goes into google.
-The first result is the LSE's [note NOT lse.co.uk which is junk] official web page for the bond. That's a decent page: it has trading details, pricing, a chart, basic fundamental data and usefully a link to the issuer.
-Second result is from cbonds.com, I think it's a Russian site, but is surprisingly well put together. However I think the good stuff is subscription only and I do not use it much these days.
-Third result is your hl.co.uk page. Then there's a random selection most of which are not that interesting. The german bourses do have decent sites though, especially if looking for lists of bonds. Thse ones I've used are boerse-frankfurt.de and boerse-berlin.com.
-I want the prospectus though, so try "XS0089553282 prospectus" in google. That does the trick.
-The third result is from fixedincomeinvestor.co.uk. This is a decent site, sadly not very well maintained recently but has okay lists of the main UK bonds and very very usefully has charts which show yield rather than price. This is great as you can do all sorts of comparisons as well. Have a play with them, starting with the gilts. If you chart the price and yield, you get an immediate insight into how short, medium and long bond prices behave in the market. (The yield is derived from the market price - look at how changes in yield are reflected in the price.) Beware though, that the yields on this site are not always calculated correctly and often have crude assumptions about call date etc. Use with a huge pinch of salt.
-The search result was for the prospectus, the "offering circular" itself in pdf form. I'd normally download this and save for future reference. Not that prospectuses are usually NOT the contract. For bonds the contract is often the Trust Deed and for shares it's the Company Articles. However a prospectus should have the same information and may incorporate a copy of the trust deed or extract from the Articles.
-Looking at the prospectus, what am I after? I want the detailed financial terms, but let's look at the document quickly first.
-The first page contains many very important details. Issue size, date, main terms including pricing, maturity and call dates etc, the Issuer and its relationship to a group or guarantor for the bonds, the form of the bonds (telling you the minimum size you can buy). Each word on this page carries specific meaning; they are not written idly!
-There often follow some pages of contents, definitions etc. Look out for specific meanings of words, and important inclusions.
-Starting page 4 of this document we get the detailed conditions of the bond. I'll list the key things I want on this reading:
Issuer/Trustee/Guarantor: Anglian Water Plc contracting with the Trustee Royal Exchange Trust Company Limited (on behalf of Bondholders) with Anglian Water Services Limited as guarantor.
Issued: 1998 (middle of the huge dotcom boom), the year of the Asian bond crisis, early in Blair government.
Shape: £1000 min denomination
Interest: the coupon rate is 5.625% payable annually. Note: the rate is fixed.
Maturity: Aug 2023, just over five years to run, modified duration about 5 years. A relatively stable price expected, low yield.
Redemption: there is a call option, available at any time with notice but at a make-good price based on gilt yield (or par if higher). This is expensive for the issuer so makes call unlikely. The bond can be priced more like a five year bond than cash, but beware peculiar market conditions!
Other options: note there are various other put and call options which usually are probably unlikely to be exercised but which require vigilance. It's no excuse to claim them to be obscure: if they're in there you agreed to them.
Covenants: Also look at any covenants and restrictions on the issuer.
Purchase: Note that tenders require and offer to all holders.-The remaining items are of lesser interest for now, but worth a skim-read if you like the bond.
-Now I search google for "site:fixedincomeinvestor.co.uk XS0089553282". This takes me to the site I wrote about earlier with nice bond charting. On the Anglian Water page:
https://www.fixedincomeinvestor.co.uk/x/mem_barclays2/bondchart.html?groupid=3653&id=421&stash=F65F51B0 I plot the price in a relative study overlaid against the 4% 2022 gilt TR22, a nearby gilt with decent data history. This is the chart:
https://www.fixedincomeinvestor.co.uk/x ... =600&h=382...and it confirms my theory that the bond pricing is going to be like a safe 5-year bond -- note how the changes are tracking the gilt market pretty closely.
-So I'm basically buying a 5-year gilt with .5% spread over gilts, more credit risk and event risk and poor tax characteristics (due to the high coupon).
-At this point it's also worth considering if anything about the price action looks suspicious, indicating a change in terms of the bonds or some optionality that you overlooked. If anything looks funny, check into the history since issue. (Maybe you should do this anyway!) e.g. I hold WestBrom 6.25% PIBS priced at 50p. That looks weird. Sure enough, their interest terms have changed and they are currently in default paying nothing. If I only read the original T&Cs I'd think they were a bargain, when they absolutely are not.
I think that'll do for now!
The Fundamental Data section shows both the denomination size and minimum initial investment as being £1000. Does this simply relate to purchases of the bond which were made when the bonds were first released back in 1998? Presumably I could buy a single one for £127.15 today if I so wished?
It also says that the 'coupon type' is a variable coupon, but the 'structure' is a fixed income/fixed rate bond........forgive my lack of understanding, but aren't the terms contradicting each other?!
If I was to buy today and hold them until the redemption date of August 2023, what would my earnings from the bonds likely to be? Would any of you be able to show me an easy to follow worked example (what with me being the less knowledgeable one in our household!) please?
The running yield is considerably higher than the National Grid example, and there are figures for the modified duration and gross redemption yield, which are absent from the NG info, could someone explain to me what these terms mean too?
Thanks in advance,
(The Real) Mel
Hopefully the above walk through gave you an insight into how you can research these things and maybe answered your questions too. Please ask if you want to know anything else, and good luck!
GS
P.S. Please excuse errors and typos. I'm not going through it with a fine-toothed comb!
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