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Reset rates of interest on bonds

Gilts, bonds, and interest-bearing shares
TheMotorcycleBoy
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Reset rates of interest on bonds

#138864

Postby TheMotorcycleBoy » May 13th, 2018, 5:55 pm

Hello everyone,

Me and Mel, were looking at a couple of corporate bonds today:

Legal & General
http://www.londonstockexchange.com/exch ... 3ZZGBPUKCP

and

Aviva
http://www.londonstockexchange.com/exch ... ml?lang=en

the yields for these look pretty reasonable.

However, then we saw the caveat about the rate being liable to reset, of course looked at the details pertaining to this here:

http://www.londonstockexchange.com/pric ... 823-ps.pdf

Quoting from the relevant section (had to type it out, couldn't copy and paste, as it was scanned)

From (and including) the Interest Payment Date falling on 1 Apr. 2019 the rate of interest payable on the notes in respect of each Interest Calculation period will be the rate per annum which is the aggregate of 2.33 per cent and the Gross Redemption Yield of the Benchmark Gilt (the "Reset rate of interest") for this purpose being the arithmetic average (rounded up if necessary to 4 d.p.) of the bid and offered prices of such Benchmark Gilt quoted by the Reference Market Makers at 3.00pm on the relevant Determination Date on a dealing basis for settlement on the next following dealing day in London. The Reset rate of interest will be payable in equal instalments semi-annually in arrears on each such Interest payment Date.

Subsequent to this, the PDF contained more verbage on the "Determination Date" and the "Benchmark Gilt". I actually found this all pretty confusing since I found it very unclear as to when and how they had calculated the GRY.

However, in summary, can we assume that the interest rate will be recalculated in order that it yields at about +2.33% more than a Benchmark Gilt?

Many thanks, and once again apologies for our general level of illiteracy in all of this...
M&M

GoSeigen
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Re: Reset rates of interest on bonds

#138890

Postby GoSeigen » May 13th, 2018, 8:41 pm

Melanie wrote:Quoting from the relevant section (had to type it out, couldn't copy and paste, as it was scanned)

From (and including) the Interest Payment Date falling on 1 Apr. 2019 the rate of interest payable on the notes in respect of each Interest Calculation period will be the rate per annum which is the aggregate of 2.33 per cent and the Gross Redemption Yield of the Benchmark Gilt (the "Reset rate of interest") for this purpose being the arithmetic average (rounded up if necessary to 4 d.p.) of the bid and offered prices of such Benchmark Gilt quoted by the Reference Market Makers at 3.00pm on the relevant Determination Date on a dealing basis for settlement on the next following dealing day in London. The Reset rate of interest will be payable in equal instalments semi-annually in arrears on each such Interest payment Date.

Subsequent to this, the PDF contained more verbage on the "Determination Date" and the "Benchmark Gilt". I actually found this all pretty confusing since I found it very unclear as to when and how they had calculated the GRY.

However, in summary, can we assume that the interest rate will be recalculated in order that it yields at about +2.33% more than a Benchmark Gilt?

Many thanks, and once again apologies for our general level of illiteracy in all of this...
M&M


Yes, that's just about right. It is pretty common for "step-up" bonds to reset to a new coupon rate on a particular date and then reset periodically thereafter. Usually the rate is a spread over a gilt, and that gilt usually has the same maturity as the interval between resets. A five year gilt is common. However, you should check exactly what the benchmark gilt is for the bond you are considering. It should be in the definitions or near where the reset is described.


GS

TheMotorcycleBoy
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Re: Reset rates of interest on bonds

#138917

Postby TheMotorcycleBoy » May 14th, 2018, 5:56 am

Thanks GS

GoSeigen wrote:Usually the rate is a spread over a gilt, and that gilt usually has the same maturity as the interval between resets. A five year gilt is common.


confirms what we thought, the exact wording in the prospectuses we saw was a tad confusing, but we got the gist.

M&M

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Re: Reset rates of interest on bonds

#138929

Postby TheMotorcycleBoy » May 14th, 2018, 8:52 am

Mel just bought 2000 nominal of these

http://www.londonstockexchange.com/exch ... PUKCP.html

for 104.4 or thereabouts.

The IWeb broker said we couldn't buy the AE57 (aviva) ones through them, but the ones above (legal & general), hopefully will be a reasonably sound plan for us; when the rate resets it does so at above +2.33 above the benchmark gilt.

Comments welcome.

Matt

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Re: Reset rates of interest on bonds

#138938

Postby GoSeigen » May 14th, 2018, 10:06 am

Melanie wrote:Mel just bought 2000 nominal of these

http://www.londonstockexchange.com/exch ... PUKCP.html

for 104.4 or thereabouts.

The IWeb broker said we couldn't buy the AE57 (aviva) ones through them, but the ones above (legal & general), hopefully will be a reasonably sound plan for us; when the rate resets it does so at above +2.33 above the benchmark gilt.

Comments welcome.

Matt


The 1% yield looks a bit skinny but probably okay if they are called next year. If not called you get a coupon of around 3.5%, I calculate yield to call in 2024 of about 2.9% for a six-year subordinated bond investment. L&G should be fairly sound. Hopefully you had a quick look at their capital structure. If they have a decent number of preference shares in issue that helps.

Not clear form your post whether you want/don't want the call next year. Also, hopefully bought in an ISA otherwise that 1-year yield falls to about 0% or -1% for a HRT!!

GS

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Re: Reset rates of interest on bonds

#138941

Postby TheMotorcycleBoy » May 14th, 2018, 10:20 am

GoSeigen wrote:
Melanie wrote:Mel just bought 2000 nominal of these

http://www.londonstockexchange.com/exch ... PUKCP.html

for 104.4 or thereabouts.

The IWeb broker said we couldn't buy the AE57 (aviva) ones through them, but the ones above (legal & general), hopefully will be a reasonably sound plan for us; when the rate resets it does so at above +2.33 above the benchmark gilt.

Comments welcome.

Matt


The 1% yield looks a bit skinny but probably okay if they are called next year. If not called you get a coupon of around 3.5%, I calculate yield to call in 2024 of about 2.9% for a six-year subordinated bond investment. L&G should be fairly sound. Hopefully you had a quick look at their capital structure. If they have a decent number of preference shares in issue that helps.

Not clear form your post whether you want/don't want the call next year. Also, hopefully bought in an ISA otherwise that 1-year yield falls to about 0% or -1% for a HRT!!

GS

We are in an ISA. Actually, I'm (buyer's regret) pondering whether it was that good an idea, since they are undated, so unless they are called in a decade or so, or the price jumps, and we make a slight capital gain and we sell, then I guess we have just something which pays ever depreciating sums and never returns the principal.

I'm often a bit hasty when I decide too buy something. But perhaps I should just chill out, and just monitor it over the years ;) .

Matt

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Re: Reset rates of interest on bonds

#138950

Postby GoSeigen » May 14th, 2018, 11:04 am

Melanie wrote:
GoSeigen wrote:The 1% yield looks a bit skinny but probably okay if they are called next year. If not called you get a coupon of around 3.5%, I calculate yield to call in 2024 of about 2.9% for a six-year subordinated bond investment. L&G should be fairly sound. Hopefully you had a quick look at their capital structure. If they have a decent number of preference shares in issue that helps.

Not clear form your post whether you want/don't want the call next year. Also, hopefully bought in an ISA otherwise that 1-year yield falls to about 0% or -1% for a HRT!!

GS

We are in an ISA. Actually, I'm (buyer's regret) pondering whether it was that good an idea, since they are undated, so unless they are called in a decade or so, or the price jumps, and we make a slight capital gain and we sell, then I guess we have just something which pays ever depreciating sums and never returns the principal.

I'm often a bit hasty when I decide too buy something. But perhaps I should just chill out, and just monitor it over the years ;) .

Matt


Okay, good to be in an ISA. Forget the buyer's regret -- it's done now. You have to think what is best from this moment. You're right, it's undated so you have an investment that potentially will never return your principal paying 5-year rates of interest. That's why I asked whether you want the call or not. If it were me, I'd want to be called. Not sure if the 2.33% spread is enough to tempt the issuer to call though.

For now, you can treat this as cash ready to be used when you find a better investment. Then sell when the moment is right to do so. Selling now in a fit of buyer's regret would just waste money. But be careful about how the business is doing because this bond has very limited upside and 100% downside.


GS

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Re: Reset rates of interest on bonds

#138979

Postby TheMotorcycleBoy » May 14th, 2018, 1:43 pm

GoSeigen wrote:Forget the buyer's regret -- it's done now. You have to think what is best from this moment.

GoSeigen wrote:Selling now in a fit of buyer's regret would just waste money.

Totally agree. No point looking back - but plenty of point in trying to learn from it (more patience!).

GoSeigen wrote:For now, you can treat this as cash ready to be used when you find a better investment. Then sell when the moment is right to do so. But be careful about how the business is doing because this bond has very limited upside and 100% downside.

Yeah. Will just take a look at it every little once in a while.

thanks again, Matt


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