Thank you very much for your answer to my last question which was exactly what I wanted to know.
This question relates to an article on the front page of the Money section of the Sunday Times yesterday, entitled "Ways to ride the rush for gold" in which Ali Hussain refers to a Corporate Bond from HSBC yelding 8.53% and redeemable (at face value) after 8 years.
It was unclear (to me) from the article whether this is a collective corporate bond fund managed by HSBC, or a single Company Corporate bond issued by HSBC, and because the detail was a bit vague, I was also suspicious whether such a product exists, or whether this was just a bit of journalistic hype. Whilst I appreciate the value of your investment in the interim will vary, the yield and redemption at face value seemed very good ? too good to be true ? Is the yield guaranteed at this level or does it depend on the performance of the holdings if its a collective fund ?Answer
The article refers to a HSBC corporate bond paying a ‘coupon’ of 9.875% which redeems on 8 April 2018, although HSBC has the option to redeem (referred to as ‘call’) on 8 April 2013.
This means if you bought £100 of bonds when originally issued you’ll receive £9.875 annual income with the return of your £100 in April 2018 or, as is more likely, in April 2013. Buy the bonds ‘second-hand’ now and you’ll still receive these returns but you’ll have to pay around £116 per £100 of bonds – i.e. they’re trading at a premium.
From this we can calculate two important figures, income yield and redemption yield, as follows:
The income yield shows income as a percentage of your investment, i.e. the £9.87 annual income divided by the cost of the bonds, £116, equal to 8.5%. This looks very impressive but ignores a major issue – if you invest £116 now you’ll only receive £100 at redemption, i.e. you’ll make a £16 loss.
To incorporate this loss into your annual return we need to calculate a redemption yield, in this case equal to a rather more modest 3.6% assuming the bonds redeem in April 2013.
So yes, the 8.53% figure mentioned in the article is a bit misleading as it’s the income yield – redemption yield is the more accurate figure to use as it reflects any gains or losses you’ll make on the price of the bonds now versus the amount you’ll receive at redemption.
Also bear in mind that corporate bonds are not guaranteed. Although unlikely, if HSBC hits financial dire straits then you might not receive income and/or your money back at redemption. And, unlike a savings account, such losses would not be covered by the Financial Services Compensation Scheme (FSCS).
In this instance I think a good fixed rate savings account is likely to be a better option, but corporate bonds can be worthwhile when the redemption yield offers an attractive premium to cash with an acceptable level of risk (i.e. the company is likely to pay both income and your capital at redemption).
Read this Q and A at http://www.candidmoney.com/questions/question292.aspx