The Lemon Fool

Any wiser Fools care to compare PIBs to one and all ?

I see they have been nominated for consideration in old Boy's fantasy fixed income portfolio and I also came across them in another blog - The Golden Guinea - as a constituent of a high yield portfolio (bonds and similar instruments, not shares).

I do hold some prefs and vaguely understand them !

But what about PIBs in the large building societies that appear to have no call dates and thus appear, on the face of it, to be there for perpetuity.

I am thinking of Leeds, Skipton and Coventry - all large building societies (by UK Building society standards), very unlikely to get into trouble and appearing to offer yields of 6-6.5%.

Ok, I get the interest rate risk and how the capital values will likely reduce should interest rates rise, but if looking at guaranteed income streams only and not ever needing to sell the capital, are these, inflation aside, pretty good near certainish income streams ?

Always eager to learn more and looking to diversify income streams in addition to HY shares.

For "compare", insert "explain" !

thebarns wrote:For "compare", insert "explain" !

Since you sent this just 2 mins after your original post, you could have just edited the original. Lemon Fool allows editing a post up to 8 mins after it is sent.

--kiloran

Oooh - care needed.

For a start, many PIBS do have call dates so don't go buying some thinking you've just secured your income for life. For example Skipton has a 6.875% PIB which, given it's price looks very attractive but it's life ends in 2017 which knocks a hole in it's YTM. Halifax has a 12% PB that is (and probably will be) callable in 2022 (that's only 5 years away).

I own quite a few but certainly don't profess to know everything. I'll leave it to somepone more knowledgeable than me to give more information.

Definitely be sure you know what you're doing before purchasing.

Laughton,

Noted on taking care.

I saw the price on the Skipton one and it is somewhere in the mid 90s, to be called next year.

Am I being incredibly naive or stupid here, but is that not a guaranteed uplift to par next year, thus a guaranteed 5-6% uplift for virtually zero risk, ie a building society of Skipton's size will not go bust between now and then ?

Why would someone not fill their boots ?

I will tread warily with these boots !

thebarns wrote:Am I being incredibly naive or stupid here, but is that not a guaranteed uplift to par next year, thus a guaranteed 5-6% uplift for virtually zero risk, ie a building society of Skipton's size will not go bust between now and then ?

You may need to read the small print. They have the ability to call, but they might not be required to. If it's their option and the bond is priced at below 100, they may not exercise their rights. Equally they might not go bust, but they may have clauses to suspend interest payments in the event of financial difficulties.

Yes - you definitely need to read the small print. This is not a PIB I own or know much about but I have a feeling that they can call at par, which as you say would be a great result for a short duration investment or they could re-set the interest payable to some lower rate based on LIBOR rates.

Usually if the deal looks too good to be true or at out of sync with other similar PIBS then rest assured there's a reason.

If anyone told you that investing was easy then they were lying.

Have a look at

http://www.fixedincomeinvestor.co.uk/x/ ... 6-875-pibs

Interesting link Laughton, thanks.

Someone else had put a similar question on that link.

I note that the interest rate can change in April 2017, which would impact on the price to be paid.

Back to the drawing board !

Educate me: what's the difference between the yield, the running yield and the coupon on a PIBS?

eg. I see a Yorkshire PIB with a 5.649% coupon, 3.069 yield and 6.01 running yield (current price 94, call 03/2019)

gbjbaanb,

I'll try, based on my understanding tho I am no expert and explain based on the basis of some corporate bonds I hold, which I do understand where the figures come from.

Tho I think PIBs are more complicated in terms of what can happen to them on the call or redemption date, ie when the issuer buys them back or has the option to do so in the case of some PIBs.

With the retail corporate bonds I hold, it is very simple on the ones I have have redeemed so far, they are just bought back at par - this does not seem to be the case with all PIBs.

The coupon is the 5.649 and the rate of interest received on day one and a notional £100.

If the bond or PIB falls below 100, in this case 94 then you will still get £5.649 of interest paid to you but will only have had to pay £94 for the privilege, as that is their current market price, giving a running yield of 5.649 divided by .94 = 6.01.

The other yield, I think it is also called the gross redemption yield when I have seen it in corporate bonds reflects the fact that when the bond is redeemed you will have a capital uplift from 94 to 100 and this is spread from the date of purchase to the date of redemption.

Now, normally I would then have expected this to increase the running yield of 6.01, but am mystified as to why you quote a figure of 3.069 ?

It may be that the PIB can be redeemed at something less than 100 which would lead to the reduced gross redemption yield, which is effectively a total yield of the annual interest and the capital gain or loss on redemption.

I think PIBs appear to be a lot less straight forward than corporate bonds in that their terms are more intricate and less easy to understand.

thebarns wrote:Any wiser Fools care to compare PIBs to one and all ?

I see they have been nominated for consideration in old Boy's fantasy fixed income portfolio and I also came across them in another blog - The Golden Guinea - as a constituent of a high yield portfolio (bonds and similar instruments, not shares).

thebarns - worth noting that that it is a 'Fantasy Annuity' Portfolio rather than a 'fantasy fixed income' portfolio. So it has a very specific aim, ie as a proxy for purchasing an annuity, so the securities will be perpetual or very long dated with no issuer call options and the aim is to generate a constant perpetual income with some preservation of capital rather than capital gains. The initial fantasy portfolio is now out at -

https://www.fixedincomeinvestments.co.u ... io/page/4/

thebarns wrote:gbjbaanb,


Now, normally I would then have expected this to increase the running yield of 6.01, but am mystified as to why you quote a figure of 3.069 ?

I think PIBs appear to be a lot less straight forward than corporate bonds in that their terms are more intricate and less easy to understand.

Thanks.
The figures I quoted were from the fixedincomeinvestments site that showed the PIB details. I quoted those, and couldn't figure out what it was saying. I get the coupon and running yield - thanks for confirming. It does seem PIBS are way more complex that they need to be, all this talk of redeeming them when the issuer feels like it, and maybe not paying out too. I think I'll stick with preference shares or bonds, much more sensible things.

gbjbaanb wrote:Educate me: what's the difference between the yield, the running yield and the coupon on a PIBS?

eg. I see a Yorkshire PIB with a 5.649% coupon, 3.069 yield and 6.01 running yield (current price 94, call 03/2019)

Sorry for the late arrival to this thread.

PIBS are no more complicated than corporate bonds or preference shares. They are much the same in fact. They are far easier to understand than shares (equity).

For PIBS the distinction between coupon, yield (i.e. GRY) and running yield, and indeed yield to call (YTC) is exactly the same as for corporate bonds.

-Bonds (including PIBS) typically have a nominal (par) price of 100. This is the price at which they will be redeemed.
-The coupon is the interest rate paid by the issuer per 100 nominal.
-The running yield is the coupon divided by current market price and has little significance beyond tax matters.
-The yield (i.e. GRY) is the return (DCF) the investor will receive to the maturity date of the bond based on current market price.
-The yield to call is the same calculation as GRY but using the call date of the bond, rather than its maturity date.

The above is all investment 101 so any investor should really be well acquainted with it before purchasing shares or bonds.

GS

What are the differences between PIBS and prefs ?
Is the GRY the same as the YTM ?

AleisterCrowley wrote:What are the differences between PIBS and prefs ?
Is the GRY the same as the YTM ?

GRY and YTM are the same.

PIBS are bonds and only issued by building societies. As bonds they pay interest instead of the dividends paid by prefs. Just like prefs the interest/dividends can be fixed or floating, they may have fixed maturity dates or be undated and may be callable. One thing that PIBS cannot be that prefs can is convertible.

For PIBS, prefs or anything else someone should have a full understanding of what they are investing in before taking the plunge. If you don't understand do some research. If you still don't understand, don't invest.

..
PIBS are bonds and only issued by building societies. As bonds they pay interest instead of the dividends paid by prefs.
What's the difference in practical terms? Taxation ? Rights when company can't pay?


Why are they Permanent Interest Bearing Shares if they are bonds?

GoSeigen wrote:

gbjbaanb wrote:Educate me: what's the difference between the yield, the running yield and the coupon on a PIBS?

eg. I see a Yorkshire PIB with a 5.649% coupon, 3.069 yield and 6.01 running yield (current price 94, call 03/2019)

Sorry for the late arrival to this thread.

PIBS are no more complicated than corporate bonds or preference shares. They are much the same in fact. They are far easier to understand than shares (equity).

Issues with PIBS is that they can call them in at par before you expect them to be, they can refuse to pay out the coupon, and they can reduce the coupon by quite a bit.

Here's an article, scroll down and you can read a little about the risks of PIBS. They are most defintely not the same as shares or corporate bonds. If you think they are, please go read up a bit more on them.

http://www.telegraph.co.uk/finance/pers ... risks.html

I think I would rather go with preference shares than PIBs.

gbjbaanb wrote:Issues with PIBS is that they can call them in at par before you expect them to be, they can refuse to pay out the coupon, and they can reduce the coupon by quite a bit.

The features you describe may also apply to other bonds and preference shares. It varies according to the terms and conditions. For example, I hold 2 PIBS (SKIP, NBSR) that have fixed payments, are undated and uncallable. I also hold a preference share (BBYB) that has a fixed maturity dates, a variable net dividend rate, is callable and convertible. Not only are the BBYB features far more complicated than the PIBS, the issuer is more complicated to assess.

gbjbaanb wrote:Here's an article, scroll down and you can read a little about the risks of PIBS. They are most defintely not the same as shares or corporate bonds.

Oh I completely agree: they are not the same as shares or corporate bonds. I hope nothing I wrote suggested that. I said they were no more complicated than prefs and corporate bonds and much simpler to understand than shares, which have variable coupons and often multiple issues of bonds senior to them.

gbjbaanb wrote:Issues with PIBS is that they can call them in at par before you expect them to be, they can refuse to pay out the coupon, and they can reduce the coupon by quite a bit.

As Paul said, corporate bonds and preference shares often have these very same features (early call options, discretionary coupons etc).

The point is to be sure to read all relevant the documentation before investing, whether it's for bonds, PIBS or preference shares -- and understand the basics of bond valuation too. One should be especially cautious with preference shares because, being equity, their terms are often laid out in both a prospectus AND the Articles of the issuing company!

GS

GS makes a good point about the Articles. That is exactly where the current terms of BBYB are to be found.