hiriskpaul wrote:Melanie wrote:Thanks for the pref share links. To be honest we are going to stick to these names I think, mainly because I'm (slightly) more knowledgeable about these firms, than the others:
LLYD BKG9.75PREF
AVIVA8.375PREF
NAT.WEST 9%PF
I'm a little unsure about NW, and LLYD, since we are already umming and ahhing LLOY ord shares, and want to spread risk etc. And I'm already a tiny bit nervous about banks, though I've heard that Lloyds is sticking to vanilla banking (i.e. not investment banking). Perhaps I'm wrong, still v. green in all this.
Anyway cutting to the chase, do we calculate our running yield at purchase, like this:
running yield = 100 / market * PREF_RATE
e.g. AVIVA8.375
100/141 * 8.375 = 5.94%
thanks Matt
That is approximately right. To get a more precise figure you need to take account of stamp duty (if you are buying) and the value of any dividend that is included in the price. As an example of the latter, take NWBD, which pays 4.5p per share every 6 months. On each ex-div date the price can be expected to drop 4.5p as you will not be receiving the next coupon. Thereafter you can expect the price to rise a little bit each day (~ 4.5p/180) until the day before the next ex-div date. In practice you will not see the precise changes due to normal market trading, or lack of, but you need to take it into account if you want a reliable yield calculation. Essentially you need to use the "Clean" price in your yield calculation, which is the market price minus the amount of dividend accrued since the last ex-div date, approximately number of days/180 times 4.5p.
Strictly speaking, that is the yield for biannual payment. You might want to annualise that yield to compare with other returns. You can do that using (1+y/2)^2-1. So if the semi-annual yield comes out as 5%, the annualised yield would be 5.0625%.
Another, potentially simpler way to calculate the annualised yield which also takes some account of the time value of money and does not rely on knowing ex-div dates is to calculate the internal rate of return of the investment over one year, taking the sell price to be the same as the buy price less the stamp duty. You can use the excel XIRR function to do that for you. Simply lay out buy/sell cashflows and dates along with the 2 coupon payments and use XIRR to calculate the IRR.
Thanks for this Paul,
Yes, Mel and I, with GoSeigen's help managed to get our heads around accrued interest and clean vs. dirty prices when we used to chat more about bonds in our early days here.
I'm cool with a lot of the calculations, and as I'm a computer nerd I wrote some python code, which I can bung in a bunch of numbers, and get a load of others out at the end (e.g. YTM, duration, and so on). (Sad, eh?
)
What I'm wondering is whether to get that fund I mentioned
here or a bunch of pref shares. The issue in my mind is that several of bigger issuers in the available pref. share world look to be like finance/banking firms (e.g. Aviva, Lloyds, etc) and so not as diverse (potentially) as bond fund, solely regarding sectors covered. And since the last big CC emanated from banking/finance (I suspect the next will do too, on reading about the large number of LBOs and M&As going on in the US lately) then perhaps that is a tad ill-informed? But having said that perhaps I'm just doing what another (GeoffF100) warned me about - trying to guess the market.
Matt