A Friend Asks About Bonds

[lennich]

A pal has some Lloyds Bank PLC 7.375% SUB MTN bonds maturing in 2020 and she asked me some questions which I can't answer, only guess at, since I don't know anything about bonds.

1) What happens when the bonds mature? i.e. is the value paid into her bank account and the bonds cease to exist?

2) What are they currently worth? How can she find out?

3) How and when can she sell them? (Can she sell them?)

Answers to any or all of these would be gratefully received.

Cheers,
Len

P.S. What do SUB & MTN mean in the bond description?

[tjh290633]

See http://www.iii.co.uk/research/LSE:44UR

Lloyds Bank PLC 7.375% Dated Subord NTS 01/06/20 (LSE:44UR)

SUB = Subordinate, MTN is not mentioned.

The EPIC is 44UR, but they don't appear to have been traded recently. Last traded at 110.9.

TJH

[Alaric]

1) What happens when the bonds mature? i.e. is the value paid into her bank account and the bonds cease to exist?

They will pay the final interest (coupon) and the maturity value of 100. The exact mechanism may depend. (The maturity might be paid as a cheque, or there might be a reinvestment option)

2) What are they currently worth? How can she find out?

I just Googled the name which found this
http://www.hl.co.uk/shares/shares-searc ... notes-2020

110.94 per 100 nominal would seem to be the current price (29th January pm). Accrued income may make the payout slightly different. The value will go down as maturity approaches, but 7.375% is a high coupon with today's interest rates.

3) How and when can she sell them? (Can she sell them?)

Through a Broker. The above mentioned Hargreaves (hl.co.uk) could no doubt do it. It's probably got to be done by phone, but they could be sold at any time during the hours the Stock Market is open for trading.

P.S. What do SUB & MTN mean in the bond description?

SUB is likely to mean "subordinate" which is a term describing where it would rank in the event of Lloyds going bust or near bust. Not top of the pile therefore. MTN is likely to mean "medium term note", thus money due for repayment at some time in the future (more than 5 years when it was first issued).

[lennich]

Thanks for all the info, guys. I'll pass it on.

If I could buy these bonds would I really be getting upwards of 6% return or am I misunderstanding something here? There must be a downside.

[tjh290633]

Thanks for all the info, guys. I'll pass it on.

If I could buy these bonds would I really be getting upwards of 6% return or am I misunderstanding something here? There must be a downside.

The downside is that, if held to Redemption in 2020, you will only get £100 back from the £110.90 paid for them. You will receive the interest payments, but they will only amount to about £10 or so, so effectively you are getting virtually nothing.

TJH

[DiamondEcho]

Agree with^, MTN = Medium Term Note, in summary a fixed income security that at issue has a 5-10 year maturity.
https://www.investopedia.com/terms/m/mtn.asp

[Alaric]

You will receive the interest payments, but they will only amount to about £10 or so, so effectively you are getting virtually nothing.

If it's paying annual coupons, that would be three payments so around £ 21 per £ 100. You lose about £ 11 from the price being above par, so there's a net gain of about £ 10 over two and a bit years.

As suggested above, it may be rarely traded, so we are speculating a bit at what price a trade would go through. It would return whatever is the yield for a two/three year Corporate Bond.

[scrumpyjack]

Another point to consider is that the annual interest will be taxable if above the personal savings allowance whereas the premium on selling the bonds now at 110 will not be as I don't think capital gains tax applies to sterling bonds.

Whether it is better to sell now at a premium or hold on and receive the interest and a lower capital redemption payment in 2020, depends on personal circumstances.

[Alaric]

Another point to consider is that the annual interest will be taxable if above the personal savings allowance whereas the premium on selling the bonds now at 110 will not be as I don't think capital gains tax applies to sterling bonds.

The last time this question came up, I think it depended on the status of the Bond as to whether it was a "Qualifying Corporate Bond".

[tjh290633]

You will receive the interest payments, but they will only amount to about £10 or so, so effectively you are getting virtually nothing.

If it's paying annual coupons, that would be three payments so around £ 21 per £ 100. You lose about £ 11 from the price being above par, so there's a net gain of about £ 10 over two and a bit years.

How do you work that out?

You get £7.375 per year, not per payment. About £1.86 per quarter. 5 or 6 payments.

TJH

[Alaric]

You get £7.375 per year, not per payment. About £1.86 per quarter. 5 or 6 payments.

What's the payment frequency? If annual, payments are due in 2018, 2019 and 2020. Even if it's quarterly, there's 4 in 2018, 4 in 2019 and 2 in 2020.

[tjh290633]

You get £7.375 per year, not per payment. About £1.86 per quarter. 5 or 6 payments.

What's the payment frequency? If annual, payments are due in 2018, 2019 and 2020. Even if it's quarterly, there's 4 in 2018, 4 in 2019 and 2 in 2020.

Sorry, I'm thinking that 2020 was next year.

TJH

[WorkShy]

The bond is semi-annual. So 5 more coupons (01Jun18,01Dec18,01Jun19,01Dec19,01Jun20) of 3.6875%. Assuming T+2 settlement, the current accrued is 1.276% (63 days accrued). So at a clean price of 110.90, the dirty price is 112.18. The yield-to-maturity is 2.52%.

Looks like the bond is very illiquid. Outstanding notional of just £23.575mm. It closed 110.67/90 in price terms (2.62%/2.52% in yield terms) but those prices seem based on an automated pricing algorithm. I can see no specific supporting bids/offers from market-makers.