Question about bond yields, and redemption value.

J

JoeB

Guest
Hi


Just a quick question about government bond yields.

Say that a standard bond issue goes as follows, for a five year bond paying 5%

issued 01-01-2008, for 100 Euro face value, 5% yield.

01-01-2009 --- 5% paid - 5 Euros.
01-01-2010 --- 5% paid - 5 Euros.
01-01-2011 --- 5% paid - 5 Euros.
01-01-2012 --- 5% paid - 5 Euros.
01-01-2013 --- 5% paid - 5 Euros. --
also 01-01-2013 bond redeemed for 100 Euros.



But we hear on the radio about bond yields increasing.. but this isn't because the rate has gone up,.. rather the bond is being sold for less than face value.

So, in the above example, if the bond yield rises to 10%, .. this is because the 100 Euro bond is being sold for 50 Euros,.. and the new buyer will get the original 5%, on the original face value, .. so 5 Euro per year, = 10% to him.


My question is this. Does the new buyer get the 100 Euro redemption value at the end? If he does then he does very well!, as he only paid 50 for the bond, and so the redemption would double his original investment, on top of his 10% per year.


Is that correct, .. that a 100 Euro bond, purchased for 50 Euro half way through the term, will still be redeemed for 100 at the end of the term, and the new buyer gets the total redemption value?



An example,.. partially sourced from
http://www.ise.ie/Prices,-Indices-Stats/Bond-Market-Data/Goverment-Bonds/

B3KWYS2 IRISH GOVERNMENT BONDS 4.00 per cent Treasury Bond 2014 € 73.130 11/07/2011

that's a 4% bond, redeemed in 2014, .. value today of 73 euros.

If I buy it, do I get 4 Euro per year interest (approx 5.35% on 73 Euro purchase price),... but also a massive redemption value of 100 Euros, which would be a 35% return on the purchase price, on top of the 5.33% per year? And all this if Ireland.ie survives till 2014.



If bondholders are burned they might not lose 100%.. they may only lose 40%. So the bond would be redeemed for 60 Euro in that case?




These seem ok to me, .. risky yes, .. but better than the bank?



Where can the bonds be purchased for the 73 Euros listed?
 
So, in the above example, if the bond yield rises to 10%, .. this is because the 100 Euro bond is being sold for 50 Euros,.. and the new buyer will get the original 5%, on the original face value, .. so 5 Euro per year, = 10% to him.


My question is this. Does the new buyer get the 100 Euro redemption value at the end? If he does then he does very well!, as he only paid 50 for the bond, and so the redemption would double his original investment, on top of his 10% per year.
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The yield quoted is what is known as the Redemption Yield. So if the bond falls to €50, the redemption yield would be much higher than 10% because...

Yes, the new buyer gets the €100 on maturity.
 
Yes Joe. You include the capital gain as part of the yield, so it's much higher than the coupon rate. There is an element of risk especially as the ECB/IMF/EU seem to be about to approve a country , Greece today, buying back its own debt at market rates. This would wipe out the capital gain in your example above and burn those who bought at par and intended to hold to maturity. Slim
 
If I buy it, do I get 4 Euro per year interest (approx 5.35% on 73 Euro purchase price),... but also a massive redemption value of 100 Euros, which would be a 35% return on the purchase price, on top of the 5.33% per year? And all this if Ireland.ie survives till 2014.
Click to expand...

For your 73 euro you will get the following cash flow:

4 , 4, 104

Getting 100 back in 3 years time for an investment of €73 is a yield of 11%. Which would give a total redemption yield of around 15%. Seems a bit high to me, but not way out.
 
If bondholders are burned they might not lose 100%.. they may only lose 40%. So the bond would be redeemed for 60 Euro in that case?

These seem ok to me, .. risky yes, .. but better than the bank?
Click to expand...

I think Irish government bonds have the characteristics of equities about them now. You may get a great return if Ireland does not default. But you could lose everything if Ireland just reneges completely on its bonds - unlikely but possible.


Where can the bonds be purchased for the 73 Euros listed?
Click to expand...
Any stockbroker

And the Capital Gain is free of CGT and income tax.
 
Well, it seems good to me.

The 73 Euro bond, redeemed in 2014 is listed on the link I gave above (www.ise dot ie). Can this bond be bought on the Irish Stock Exchange for 73 Euros today?

If one gets 4, 4, then 104 that's a total return of 112 Euros,... for a bond purchased at 73 today.

112 - 73 = 39 Euros profit (on 73 invested)

so 39 / 73 = .534 (or 53.4% expressed as a percentage). So 53% profit over three years, .. with risk involved.

That's likely very equivilent to Brendans 15% per year, cumulative. (spelling?)



There's another bond..
B60Z619 IRISH GOVERNMENT BONDS 5.00 per cent Treasury Bond 2020 € 56.000 11/07/2011

5% per year, but selling for 56 Euro (100 face value).. redeemed in 2020 for 100. If Ireland doesn't default then that bond would provide exceptional returns, wouldn't it? (approx 9% per year until 2020, and then a bonus of approx 80% on the capital invested). Even if Ireland does default will it burn 100% of the value?
 
A more likely scenario is that instead of repaying the capital value of € 100 in 2014, the holder may be forced to roll-over his/her loan for another 10 years, until 2024, with the annual interest payment of € 4 being maintained until then.

The current price and yield of these bonds reflect that the market participants do not expect to get 100 in 2014.
 
Is a forced roll over called a default?

There are bonds due to be redeemed in 2011, 2012, 2013, and also 2014. If any of those are rolled over that'd be reported as a default in the international press, wouldn't it? So the government will be trying to avoid that.


Yes, I agree that the market considers the bonds fairly priced... even if the bonds offer greater than a 50% gain over three years. So the markets don't think much of our ability to repay, that's clear.


Putting 10K into Irish Bonds may offer returns of 50%. Putting 10K into some irish banks may get you <10% in the same three years, .. and surely the risks are similar? I know the bank deposit is guaranteed, but there are some questions about our ability to honour the guarantee, especially if we've burned the bondholders. (I support burning bondholders if possible, .. even if I do end up buying some bonds!)


(My apologies if my calcs as regards profits are wrong.. it could be that the bonds listed on the ISE website aren't available at that price to the public. Or perhaps they are, I'll know later.)

PS Just heard on the news, .. Irelands credit rating has been downgraded to junk status by Moodys. So the bond will be cheaper, and riskier.
 
JoeBallantin said:
Putting 10K into Irish Bonds may offer returns of 50%. Putting 10K into some irish banks may get you <10% in the same three years, .. and surely the risks are similar?
Click to expand...

That's a question i've been asking myself too.

Do deposits in domestic banks or for example, do Solidarity Bonds carry the same risk as Government Bonds?
I mean if I bought Solidarity Bonds at 4% for 10 years, is it the same risk as buying 10 year Government Bonds at 13% ?
 
spreadsheet said:
I mean if I bought Solidarity Bonds at 4% for 10 years, is it the same risk as buying 10 year Government Bonds at 13% ?
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Yes, you are exposed to exactly the same risk, but receive a miserable reward, that's why solidarity bonds are a very poor choice of investment, at least in my opinion.
 
I have to be careful here but I wonder why the Government would offer something for sale that is considered a poor choice by professionals? I'm not a professional by the way, but that seems to be the concennus.

Incidentally the Sol. Bond pays 1% per year, and there's additional bonuses, after 5, 7 and 10 years which make up the difference.
http://www.*****************.com/national-solidarity-bond.html


There's a 2019, 5.9% Treasury Bond selling for 61, face value 100. So the effective interest rate = (5.9/61*100) = approx 9.5% per year, and if redeemed in full there'd be extra there too.
http://www.ise.ie/Prices,-Indices-Stats/Bond-Market-Data/Goverment-Bonds/

Apparently Ireland may have to re-fund in 2013.. if so that might represent a very important date. The 2012 Bonds seem to be trading at about 95.. whereas the 2013 ones seem to about 82, and about 70 for 2014... all face value 100 as far as I can tell. Interest rates vary from about 4% to 9%
 
Has the Irish Government actually redeemed any bonds in the recent past? Slim
 
Slim said:
Has the Irish Government actually redeemed any bonds in the recent past? Slim
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Not sure where to get data about past maturity dates, but you can get upcoming maturity dates here:
[broken link removed]

Ireland has to refinance about €10b of debt between this year and next. From 2014 it will be in the region of €10b per year.
 
Slim said:
Has the Irish Government actually redeemed any bonds in the recent past? Slim
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The Irish Government has honoured all interest and capital payments in the last 20 years. I'm not sure what happended in the 70s and 80s.
 
Well, that's great news.

Redmayne-Bentley (Cork) is one company that deal in these, and Campbell O’Connor is another, .. they seem to be the most competative. Not sure if I shoould give prices but approx 50 to 100 to buy 10,000, and no other fees apparently. It seems to be necessary to open an account, and pass money laundering tests.

This link gives the bonds
http://www.ise.ie/Prices,-Indices-Stats/Bond-Market-Data/Goverment-Bonds/

only one of them is semi-annual, with two interest payments per year. It's 8.75%, trading at 99, redeeming in Sept 2012.. so three interest payments until redemption.
Is each interest payment half the full year,.. ie 8.75/2?


Market is volatile today,.. perhaps a good time to buy junk bonds that may become good. It's hard to see the difference between 'considered investment decisions' (of this sort), and gambling. Bettng on red offers a 100% return.


My calculations seem to show that the 2013, 5% bond would offer a 34% profit (minus fees), and it redeems in April 2013. That's 21 months away or thereabouts. It's trading at 82, as per stock exchange link.

So 10,000 could turn into 13,200, if Ireland doesn't default by April 2013. I really hope that calculation is correct. (Approx 6% per year adjusted coupon rate, 2012 and 2013, also 22% bonus on redemption, if redeemed in full)
 
I seem to be praising these bonds, but the market surely knows more than I do, so perhaps they're only fairly priced, or even unfairly priced, it's hard to tell. But the risks are large, that seems certain.


I was thinking, .. can you bet in the bookies on Ireland defaulting, or not defaulting, and if so, are the odds better?
 
What you're talking about is the Yield to Maturity. This is the % rate where the coupon (interest) payments and the redemption minus the market price would have a net present value of zero.

In your example of a 5 year, €100, 5% bond selling at €50 the Yield to Maturity would be 22.7% (this is the yield that you see quoted for soverign bonds).
 
NTMA - Irish Government Bond Yields and where to buy bonds & fees

On the NTMA website www.NTMA.ie there is list of 9 Irish brokers, with names & contact numbers, and it shows the fees that each broker charges. See under "Government Bonds" and then "Where to Buy Bonds".

Last night's interest rate or yield is shown under "Outstanding Bonds" and the at the top of that web page there is pdf called "Today's Irish Government Bonds Outstanding Report" which is updated daily.
 
Originally Posted by spreadsheet http://www.askaboutmoney.com/showthread.php?p=1183827#post1183827
I mean if I bought Solidarity Bonds at 4% for 10 years, is it the same risk as buying 10 year Government Bonds at 13% ?



Yes, you are exposed to exactly the same risk, but receive a miserable reward, that's why solidarity bonds are a very poor choice of investment, at least in my opinion.
Click to expand...
I agree that Solidarity Bonds are a bad investment, but I don't think it's correct to say that "you are exposed to exactly the same risk"

If the Irish government defaults or restructures its debts, it may treat different classes of debt differently. Investors in government bonds will get hit, but savings in the post office are less likely to get hit.
 
I'm not sure about - legally I would imagine that they are both equal. So I suppose that if National Savings are treated differnetly to Government Bonds, this would end up in the courts.

The Post Office act as agents for National Savings.

On the NTMA web-site it states explicitly "With NTMA State Savings™, your money is placed directly with the Irish Government."

Furthermore on the summary brochure , it states "Repayment is a direct, unconditional obligation of the Government of Ireland"
 
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