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Learning about investments in bonds

Gilts, bonds, and interest-bearing shares
TheMotorcycleBoy
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Learning about investments in bonds

#126306

Postby TheMotorcycleBoy » March 20th, 2018, 10:26 am

Hi,

My husband and I are wishing to invest in bonds/gilts. We are very new to the whole subject of investment, as have only invested some cash in an assortment of shares using IWeb. We'd now like to diversify a bit and would like to invest between 5 - 10k in bonds.

We understand the basic concepts (i.e. after the agreed period the principal is, hopefully, returned and each year an interest payment, "coupon" is paid out), but slightly confused about the naming, i.e. does bonds refer to a loan to private companies, and gilts mean the loan is to a government/country?

Now, down to specifics. Where should we start looking for bond investments opportunites? A quick google revealed a few possibilities, and in particular we noticed this site:

http://www.simple-investing-uk.com/

and wondered if whether any of you had seen these people and whether they are legitimate. The products on offer certainly look very good in our eyes, e.g.

6.5% pa for 3 years in property
9% pa for 5 years in renewables
10% pa for 5 years in property

but were slightly put off by the disclaimer at the bottom of the page:

Investment may be restricted to Certified High Net-Worth Individuals, Sophisticated Investors, Professional Investors, Restricted Investors or any person or body corporate defined as exempt under FSMA and the FCAs Conduct of Business Sourcebook (COBS).

Any advice about bond investment and about the "simple-investing-uk.com" products would be much appreciated.

Mel :)

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Re: Learning about investments in bonds

#126313

Postby Alaric » March 20th, 2018, 10:38 am

Melanie wrote:Any advice about bond investment and about the "simple-investing-uk.com" products would be much appreciated.


I would imagine there isn't a market in the bonds offered by simple-investing-uk.com so once they have your money you are vulnerable to the reliability and solvency of the Companies they've lent money to. A 10% return reflects a premium for the risk that you may never see your money again.

As regards retail investors, in general the term Gilts refers to instruments issued by the UK Government and Bonds to everything else. They both work the same in paying a fixed or indexed coupon for a number of years (the term) and then a maturity payment.

"Retail Bond" is the key search here.
http://www.iii.co.uk/ipos/retail-bond-issues

Gilt or Bond funds and ETFs offer greater diversity at a probably higher cost than direct investment.

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Re: Learning about investments in bonds

#126319

Postby GoSeigen » March 20th, 2018, 10:48 am

Melanie wrote:http://www.simple-investing-uk.com/

and wondered if whether any of you had seen these people and whether they are legitimate. The products on offer certainly look very good in our eyes, e.g.

6.5% pa for 3 years in property
9% pa for 5 years in renewables
10% pa for 5 years in property

but were slightly put off by the disclaimer at the bottom of the page:

Investment may be restricted to Certified High Net-Worth Individuals, Sophisticated Investors, Professional Investors, Restricted Investors or any person or body corporate defined as exempt under FSMA and the FCAs Conduct of Business Sourcebook (COBS).

Any advice about bond investment and about the "simple-investing-uk.com" products would be much appreciated.

Mel :)


Whoa, that site is quite likely a scam of some sort. Definitely bargepole territory for me.

When people ask this question I almost always reply along these lines: You have said you want to buy £5000 worth of bonds, but have not said what your goals are, apart from diversification; is there anything else you are looking for from this investment?

The reason I ask is that the bond (or fixed interest) world is hugely diverse, from short gilts that behave like cash, to preference shares which are the senior siblings of ordinary shares, where some holders have just discovered they could lose 40% of their capital. Here's my message to another poster for some ideas:

viewtopic.php?p=123997#p123997

Regarding terminology, it's slightly more complicated than you suggested, but yes, in the UK "bonds" (sometimes "notes") usually refer to corporate issues, while "gilts" or "gilt-edged" securities are a traditional term for UK government bonds.

As I said, there is an entire universe of these things so you need to think about your aims in order to narrow down the field.


GS

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Re: Learning about investments in bonds

#126320

Postby AleisterCrowley » March 20th, 2018, 10:51 am

A quick google revealed a few possibilities, and in particular we noticed this site:

http://www.simple-investing-uk.com/

and wondered if whether any of you had seen these people and whether they are legitimate. The products on offer certainly look very good in our eyes, e.g.

6.5% pa for 3 years in property
9% pa for 5 years in renewables
10% pa for 5 years in property


Hmmmm...... I'd be very cautious. Do plenty of research before getting anywhere near those...


This is an interesting site;
https://www.fixedincomeinvestor.co.uk/x/default.html

likewise
http://monevator.com/bond-asset-classes/

Both respected sites

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Re: Learning about investments in bonds

#126362

Postby TheMotorcycleBoy » March 20th, 2018, 12:21 pm

Ok, firstly thanks to you all, for your replies,

GoSeigen wrote:Whoa, that site is quite likely a scam of some sort. Definitely bargepole territory for me.


Yes, the returns do seem too good to be true! I did phone through to the "contacts" relating to the page. The page is a "landing page" (they have several) for a marketing (presumably commission driven) firm called "Money Seed".

They seem to be middle-men for firms wishing to raise money (via. corporate bonds).

The "property development" bond offer, I think, related to investments in a company which renovates dilapidated housing and rents back to Social Security-type tenants. Which is where the revenue comes from to pay back investors. Apparently.....

GoSeigen wrote:When people ask this question I almost always reply along these lines: You have said you want to buy £5000 worth of bonds, but have not said what your goals are, apart from diversification; is there anything else you are looking for from this investment?


Sorry, I didn't elaborate further. Our reason for investing is long-term growth. We are not interested in liquidity, as will always have some cash in the bank for other needs. Now that we have some shares (higher risk), we'd now like to some money into safer investments e.g. bonds/gilts. In the past we have purchased a "Legal and General deposit bond" which returned just over the inflation rate over a 5 year period (don't the specifics to hand) and we are after something similar.

So seeing as UK inflation rate is currently ~2.8%, we are hedging our bets that seeing as it is currently falling, that any bond investment yielding from 3-3.5% pa for the next 3 years or so would be worth consideration.

GoSeigen wrote:https://www.lemonfool.co.uk/viewtopic.php?p=123997#p123997


Thanks again, will follow your ref. to an earlier post - and continue to research!

Mel

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Re: Learning about investments in bonds

#126367

Postby TheMotorcycleBoy » March 20th, 2018, 12:30 pm

So I've just found this earlier post:

Alaric wrote:The current prices would under perform inflation (if measured by RPI) by about 1/2%.

Outside of government borrowings, almost no other potential issuer is prepared to risk the open ended, out of control commitment that inflation linking can represent.

National Grid are one of the few exceptions. Being a monopoly might help. Note that it's only got 3 years more to run.

http://www.hl.co.uk/shares/shares-searc ... -bond-2021


Please, my naivety here, I'm just a beginner, but by saying "1.25 RPI", is that saying 1.25% above the current inflation rate?

many thanks
Mel :)

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Re: Learning about investments in bonds

#126370

Postby Alaric » March 20th, 2018, 12:36 pm

Melanie wrote:Please, my naivety here, I'm just a beginner, but by saying "1.25 RPI", is that saying 1.25% above the current inflation rate?


It would usually mean that it pays out 1.25% in interest, but the interest as well as the capital repayment increases with the RPI. Whether your overall return is 1.25% + RPI depends on the price you pay to buy into the bond relative to what you get back when it matures. One way of looking at it is to ask what you get if RPI was zero from now until maturity.

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Re: Learning about investments in bonds

#126412

Postby TheMotorcycleBoy » March 20th, 2018, 1:49 pm

Alaric wrote:One way of looking at it is to ask what you get if RPI was zero from now until maturity.

Ok, so yes, this bond is fixed as paying 1.25% above the "current" inflation rate. I guess if they didn't mean above RPI, they would just say "1.25" alone.

Alaric wrote:It would usually mean that it pays out 1.25% in interest, but the interest as well as the capital repayment increases with the RPI. Whether your overall return is 1.25% + RPI depends on the price you pay to buy into the bond relative to what you get back when it matures. One way of looking at it is to ask what you get if RPI was zero from now until maturity.


I didn't really understand this. Are you merely implying compound rather than simple interest. Perhaps an example would help?

So is the point that you are making, the difference between (assuming an initial amount of 100 pounds, 1.25% and 2 year period):

100 + 12.5 (after year 1)
100 + 12.5 + 12.5 (after year 2)
100 + 12.5 + 12.5 + 1.25 (after year 3)

and

100 + 12.5 (after year 1)
(100 + 12.5) + (112.5)*0.0125 (after year 2)

?

thanks again
Mel

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Re: Learning about investments in bonds

#126434

Postby Alaric » March 20th, 2018, 2:28 pm

Assume you buy it when issued at 100 and it runs for three years.

First assumption RPI = 0

end of year 1
you get 1.25 in interest
end of year 2
you get 1.25 in interest
end of year 3
you get 1.25 in interest and 100 in repayment of capital

Second assumption RPI = 2% per year

end of year 1 you get 1.25*1.02 = 1.275
end of year 2 you get 1.275*1.02 = 1.3005
end of year 3 you get 1.3005*1.02 = 1.32651 and 100*1.02*1.02*1.02= 106.12

So over three years you have gained 2% a year from the RPI and 1.25% approx from the coupons.

If however you buy on a secondary market, what is the likely price? At the end of year 1, it could be 100*1.02 = 102. If however you pay a higher or lower price, your return is below or above the RPI + 1.25% target.

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Re: Learning about investments in bonds

#126468

Postby TheMotorcycleBoy » March 20th, 2018, 4:25 pm

Alaric wrote:Assume you buy it when issued at 100 and it runs for three years.

First assumption RPI = 0

end of year 1
you get 1.25 in interest
end of year 2
you get 1.25 in interest
end of year 3
you get 1.25 in interest and 100 in repayment of capital

Second assumption RPI = 2% per year

end of year 1 you get 1.25*1.02 = 1.275
end of year 2 you get 1.275*1.02 = 1.3005
end of year 3 you get 1.3005*1.02 = 1.32651 and 100*1.02*1.02*1.02= 106.12

So over three years you have gained 2% a year from the RPI and 1.25% approx from the coupons.


Thanks for confirming the above. That's what I'd anticipated.

Alaric wrote:If however you buy on a secondary market, what is the likely price? At the end of year 1, it could be 100*1.02 = 102. If however you pay a higher or lower price, your return is below or above the RPI + 1.25% target.


http://www.hl.co.uk/shares/shares-searc ... -bond-2021

Ok, so presumably the above is the sale/purchase of an NG-1.25-RPI bond on the secondary market?

Can you clarify some figures visible on that linked webpage? I can see 123.50 sell and 125.10 buy prices which are self explanatory......but what else can I deduce? I see 100.00 as denomination price, does this mean, that this "item" currently for sale at 123.50 was originally sold/issued by NG for 100.00?

Even if my assumption above is correct, how can I calculate the coupon values for the years to come? Do I not also require the issue date (to discover how many 1.25s to multiply together?)....which the linked page does not show.

thanks again,
Mel

Mel

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Re: Learning about investments in bonds

#126479

Postby Alaric » March 20th, 2018, 5:09 pm

Melanie wrote:..but what else can I deduce? I see 100.00 as denomination price, does this mean, that this "item" currently for sale at 123.50 was originally sold/issued by NG for 100.00?


I think that would be correct.

To find out the coupon, you usually need the RPI Index value at the date of issue and the RPI Index value at the time of the coupon, together with any rules about using delayed values.



Melanie wrote:Even if my assumption above is correct, how can I calculate the coupon values for the years to come? Do I not also require the issue date (to discover how many 1.25s to multiply together?)....which the linked page does not show.


The next coupon would be 1.25 * RPI Index now / RPI Index at issue. I would search the National Grid pages as first port of call for how the coupon is determined exactly. The reason for using a delayed index is so that the amount of coupon is known some months in advance. Government Index Linked used to do it that way, but I think they now use a more up to date index.
Last edited by tjh290633 on March 20th, 2018, 5:36 pm, edited 1 time in total.
Reason: Superfluous Tag removed - TJH

TheMotorcycleBoy
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Re: Learning about investments in bonds

#126706

Postby TheMotorcycleBoy » March 21st, 2018, 12:31 pm

Alaric wrote:Assume you buy it when issued at 100 and it runs for three years.

First assumption RPI = 0

end of year 1
you get 1.25 in interest
end of year 2
you get 1.25 in interest
end of year 3
you get 1.25 in interest and 100 in repayment of capital

Second assumption RPI = 2% per year

end of year 1 you get 1.25*1.02 = 1.275
end of year 2 you get 1.275*1.02 = 1.3005
end of year 3 you get 1.3005*1.02 = 1.32651 and 100*1.02*1.02*1.02= 106.12

So over three years you have gained 2% a year from the RPI and 1.25% approx from the coupons.

If however you buy on a secondary market, what is the likely price? At the end of year 1, it could be 100*1.02 = 102. If however you pay a higher or lower price, your return is below or above the RPI + 1.25% target.


Hi,

I took some time to think about this - in particular regarding the NG-1.25-RPI example, and how you'd established those coupon return values. I could only get my head around it if I thought in terms of as it's RPI linked, then I tried to consider how my capital would appreciate over the years, given that since this is RPI linked, then a correction must be made for real prices.

So with 1 single bond priced 100 (at 2011), and assuming 2% inflation, thus the rate r="capital appreciation factor", then at october 2012 (i.e. after 1 year) the capital has been appreciated to

100 * r = 100 * 1.02, at end of october 2012
100 * r * r = 100 * 1.02 * 1.02 at end of october 2013


so there's a simple rule that after n years the capital is now equal 100 * (r to power of n)

and therefore the coupon value associated with this single bond for any year n, is just 100 * (r to power of n) * c , where c="coupon interest", e.g. 1.25% in this case.

So therefore, as an example the coupon paid out at october 2014 would be 100 * 1.02 * 1.02 * 1.02 * 0.0125 = 1.3265 (in agreement with the quoted post above).

So....if I was buy 1 NG-1.25-RPI now, with the above assumption re. inflation, and the total monies over the years I would receive, if I stayed in till maturity at october 2021 would be:

capital returned at 100 * r^10 (i.e. 1.02 to the power of 10)
coupon for 2021 100 * r^10 * 0.125
coupon for 2020 100 * r^9 * 0.125
coupon for 2019 100 * r^8 * 0.125
half of the 2018 coupon (or some other approximation for months from now to october 2018)


(Apologies for my notation, I hope it's vaguely understandable :lol: )

Presumably I could refine my estimates by looking up the inflation figures for 2011-2018, etc. and some "predictions" for now till 2021?

Am I starting to get the hang of it?

thanks Mel :)

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Re: Learning about investments in bonds

#126752

Postby mc2fool » March 21st, 2018, 3:45 pm

Melanie wrote:
coupon for 2021     100 * r^10 * 0.125
:

0.0125, but otherwise fine :)

Presumably I could refine my estimates by looking up the inflation figures for 2011-2018, etc. and some "predictions" for now till 2021?

The Information Booklet on the HL page you linked to gives a clear and easy to read (compared to the legalistic Prospectus and Final Terms) explanation of how the bond works. One of the things to note from that are that the RPI figures used are those 8 months prior to any event. So the Base RPI used in the calculation of coupons and for the final redemption is that of Feb-2011 (8 months before the issue date of Oct-2011), and that was 231.3.

You asked earlier what you can deduce from the figures on the HL page ... well one of the figures, the Running yield at 1.006%, being notably less than the headline coupon of 1.25%, tells you that the bond is currently trading above the RPI-adjusted par value.

You can figure out by how much by looking up the RPI for 8 months ago, Jul-2017, which was 272.9, and multiplying it by the issue price and dividing by the base RPI figure. So, £100 * 272.9 / 231.3 = £117.99. That's the current RPI-adjusted par value, but it's selling for £125.10.

Here's a simpler-than-digging-though-the-ONS source for RPI: http://www.wolfbane.com/rpi.htm

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Re: Learning about investments in bonds

#126754

Postby Alaric » March 21st, 2018, 3:53 pm

mc2fool wrote:So, £100 * 272.9 / 231.3 = £117.99. That's the current RPI-adjusted par value, but it's selling for £125.10.


The value of the bond, if you buy it now, won't keep up with inflation in prices as measured by the RPI. You will however get 1.25%of its adjusted nominal value each year as interest. If it had been issued by the UK government, today's buying price would likely be higher than £ 125 and the coupon a factor of 10 or more smaller, so 0.125% or less.

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Re: Learning about investments in bonds

#126761

Postby mc2fool » March 21st, 2018, 4:06 pm

Alaric wrote:
mc2fool wrote:So, £100 * 272.9 / 231.3 = £117.99. That's the current RPI-adjusted par value, but it's selling for £125.10.

The value of the bond, if you buy it now, won't keep up with inflation in prices as measured by the RPI. You will however get 1.25%of its adjusted nominal value each year as interest.

Indeed, but just to be clear for Melanie, the adjusted nominal value (using the today figures above and assuming no further changes) is currently the £117.99 and that's what she'll be getting 1.25% of. However, if she buys it today she'll be paying £125.10 for it so will actually be getting 1.25 * 117.99 / 125.10 = 1.18% interest on her investment.

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Re: Learning about investments in bonds

#126818

Postby TheMotorcycleBoy » March 21st, 2018, 6:27 pm

mc2fool wrote:You asked earlier what you can deduce from the figures on the HL page ... well one of the figures, the Running yield at 1.006%, being notably less than the headline coupon of 1.25%, tells you that the bond is currently trading above the RPI-adjusted par value.

Thanks again, that's useful to know. You're saying it's selling for about 1.006 * more than what it's really worth or something?

mc2fool wrote:You can figure out by how much by looking up the RPI for 8 months ago, Jul-2017, which was 272.9, and multiplying it by the issue price and dividing by the base RPI figure. So, £100 * 272.9 / 231.3 = £117.99. That's the current RPI-adjusted par value, but it's selling for £125.10.

Here's a simpler-than-digging-though-the-ONS source for RPI: http://www.wolfbane.com/rpi.htm

Hmm... I'm guessing that those inflation figures are % values multiplied by 100?

I'm surprised that the real "today" value is as simple as

issue price * rpi_at_issue/rpi_presently

I'd thought that a more complex, kind of accumulative formula would be used, for example accounting for inflation being ~0.5% in 2015?

I'm puzzled as to how/why these type of fluctuations are missing in the above formula from mc2fool. :?

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Re: Learning about investments in bonds

#126823

Postby Alaric » March 21st, 2018, 6:36 pm

Melanie wrote:I'm puzzled as to how/why these type of fluctuations are missing in the above formula from mc2fool. :?


Whilst inflation is quoted in the press as a percentage, the way the figures are prepared are by the basket of goods method.

So you have a set of items that cost 100 in 2016, then you find in 2017 they cost 102, you can announce that inflation over the last year was 2%. So if prices fall, that's really not a problem and should introduce no new principles. It's simpler than you think as you don't need to know the intermediate values, for the notional capital value anyway.

There can be an added piece of small print. When it comes to pensions in payment, sometimes there's a rule which says they cannot be reduced. It's what happens after that where there can be two possible rules.

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Re: Learning about investments in bonds

#126828

Postby mc2fool » March 21st, 2018, 6:44 pm

Melanie wrote:Thanks again, that's useful to know. You're saying it's selling for about 1.006 * more than what it's really worth or something?

No, the running yield is the last 12 months coupons divided by the current price.

It's selling for 125.10/117.99 = 6% more than the RPI adjusted par value.

Melanie wrote:Hmm... I'm guessing that those inflation figures are % values multiplied by 100?

No, RPI is the Retail Price Index. The changes in RPI are what is expressed as a %age.

So, given the figures already presented, a basket of goods that cost you 231.3 in February 2011 would have cost you 272.9 in July 2017. That would mean inflation of ((272.9/231.3)-1)*100 = 17.99% over the period.

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Re: Learning about investments in bonds

#126850

Postby Breelander » March 21st, 2018, 7:50 pm

Melanie wrote:Hmm... I'm guessing that those inflation figures are % values multiplied by 100?


No. The RPI is an index, just like the ftse100 is an index, the RPI has a baseline of 100 in Jan 1987. This is the source data, you can see its chart generally increases over time.

https://www.ons.gov.uk/economy/inflatio ... /chaw/mm23

The commonly quoted percentage figure is the inflation rate, that is the percentage change in the RPI over 12 months. That's here...

https://www.ons.gov.uk/economy/inflatio ... eries/czbh

CPI is the preferred measure now, though RPI is still used for indexed savings and other things. The CPI data is here...
https://www.ons.gov.uk/economy/inflatio ... eries/cdko
https://www.ons.gov.uk/economy/inflatio ... eries/D7G7

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Re: Learning about investments in bonds

#126857

Postby Breelander » March 21st, 2018, 8:09 pm

Breelander wrote:CPI is the preferred measure now, though RPI is still used for indexed savings and other things. The CPI data is here...
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cdko
https://www.ons.gov.uk/economy/inflatio ... eries/D7G7

CPI index, all items 2015=100 https://www.ons.gov.uk/economy/inflatio ... /d7bt/mm23


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