# Question about bond yields, and redemption value.



## JoeB (12 Jul 2011)

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?


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## Brendan Burgess (12 Jul 2011)

> 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.



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.


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## Slim (12 Jul 2011)

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


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## Brendan Burgess (12 Jul 2011)

> 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.



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.


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## Brendan Burgess (12 Jul 2011)

> 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?



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?


Any stockbroker 

And the Capital Gain is free of CGT and income tax.


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## JoeB (12 Jul 2011)

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?


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## jpd (12 Jul 2011)

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.


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## JoeB (13 Jul 2011)

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.


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## spreadsheet (13 Jul 2011)

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?



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% ?


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## Chris (13 Jul 2011)

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% ?



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.


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## JoeB (13 Jul 2011)

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%


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## Slim (13 Jul 2011)

Has the Irish Government actually redeemed any bonds in the recent past? Slim


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## Chris (13 Jul 2011)

Slim said:


> Has the Irish Government actually redeemed any bonds in the recent past? Slim



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.


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## jpd (13 Jul 2011)

Slim said:


> Has the Irish Government actually redeemed any bonds in the recent past? Slim



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.


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## JoeB (13 Jul 2011)

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)


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## JoeB (13 Jul 2011)

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?


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## tvman (13 Jul 2011)

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).


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## Black Rock (13 Jul 2011)

*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.


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## Brendan Burgess (13 Jul 2011)

> 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% ?
> 
> 
> ...


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.


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## jpd (13 Jul 2011)

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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## jpd (13 Jul 2011)

The next Government Bond due for repayment is € 4.39 BN due on 11/11/2011 - it'll be interesting to see what happens then.


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## JoeB (14 Jul 2011)

THE EU / IMF deal must cover these capital repayments. They were known about all throught the negotiations.

Yes, the report today could throw some spanners into the plans.. report by the EU / IMF due out this afternoon, on Ireland's progress to date. Special show on RTE radio, after the 13.30 news. (14-07-2011)


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## SPC100 (22 Jul 2011)

jpd said:


> The next Government Bond due for repayment is € 4.39 BN due on 11/11/2011 - it'll be interesting to see what happens then.



[broken link removed]

there is a 9% yield to maturity on that one,

so that seems to be, if you bought now, you would get ~103% back in November.


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## JoeB (22 Jul 2011)

The next to be redeemed bond is selling for around 99 I think, so the exact payment should be 104, on the 11-11-11.. I'm not sure how much you'd actually pay to buy it if it's listed at 99 on the ISE. (It was 97.92 a few days ago which would give a much greater return.)


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## elacsaplau (23 Jul 2011)

Given the chnages announced this week to the interest rate payable and duration of our national loans, can someone help me evaluate the risks now associated with investing in Irish government bonds? What I'm getting at is that the markets are currently pricing in a % probability of default and I'm wondering whether people think (and why) the market has over or under estimated this risk?!


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## Chris (26 Jul 2011)

Personally I don't think last week's deal has done anything to alleviate an Irish default significantly. All it has done is make sure that future interest bill will not be as high as it otherwise would be, and even at that it is not an amount that will make a difference. Ireland still has a massive deficit, no signs of growth, and a potential debt level of €200 to €250 bn by 2014, which is simply unrealistic.
Personally I still would not touch Irish bonds with a barge pole even with the 10 year yield having dropped from 14% to 12% in the last few days.


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## JoeB (26 Jul 2011)

No, I don't think the deal will be enough, even if I know very little about it.

 But the bond prices have risen slightly, (so yields have fallen).  The 5% bond I was interested in, the 2013 one, has gone from as low as 76.51 last week to about 87.50 today,.. so the capital appreciation available has been hammered which would be free of Capital Gains Tax.

So before last Thurs was the time, for me anyway. I think the 76.51 price was very low ...for a 5% bond due to be redemmed in April 2013. It was offering CGT free Capital Gains of around 30%, in 21 months)


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## JoeB (4 Aug 2011)

The Irish Post Office bonds were described as a 'rip off' by the personal money expert on Newstalk this morning. (04-08-2011, between 9.28am and 9.32 am)

I know we're not allowed use the phrase 'rip off' here.. I'm just reporting that he said it!

He pointed out that the normal bond markets are paying much higher rates than the post office. 


My piece... Unless the Gov.ie was to come out and say, clearly, that in the event of a default the Post Office will not be touched.. unless and until that happens the 10 year solidarity bond, which only pays 1% per year (the rest is bonuses, years 5, 7 and 10), isn't a good deal. 

But of course our government is denying to the ground that default is even a possibility... which is delusional in my view, given the yields on the ISE, and our overwhelming debt. (Perhaps I'm wrong, perhaps the Gov does acknowledge that default is a possibility)


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## Brendan Burgess (4 Aug 2011)

Hi Joe

A new thread started in the meantime on this very issue. 

Do savings certs have the same (non)safety as Irish government bonds?

Do you know the name of the contributor to the Newstalk programme? 

Brendan


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## Sunny (8 Aug 2011)

I agree there are more attractive products out there but there are a couple of things that these commentators seem to forget. Aren't the bonuses on the post office tax free? Isn't the interest charged at DIRT? 

You go to a stockbroker and buy a Irish Government bond, you will have a minimum size, stockbroker transaction fees, custodian fees, interest is payable at your marginal rate of tax etc etc. I haven't done the maths but all this makes a difference. 

Buying Government bonds directly as an individual is not attractive. The Government should look at changing this as a healthy domestic market for it's securities would be ideal. However a retail customer with 100k to invest will never get the same return as an investor with 100m.


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## Slim (8 Aug 2011)

Black Rock said:


> 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". .


 
I thought the rates were quite affordable for a modest purchase, say €10k and up.

Slim


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## JoeB (8 Aug 2011)

Yes, I gave approx fees earlier. You can buy for 50 minimum charge, no other fees. These are held in certificated form, and your bank details are lodged with the issuer of the bond.. the interest payments are made directly into your bank, as is the redemption amount. So there's there's only the original 50 Euro purchase fee, (through at least one stockbroker who offers that price, whom I have personally confirmed the price with.)

I think you pay tax on the interest payments, .. but NO TAX whatsoever on the capital appreciation. It's the capital appreciation that can represent good value.

I would now only buy at as little as 20% to 40% for long bonds, and about 60% for bonds maturing within two years.


On the fees... as the bonds are held in certificated form, as opposed to being in a account, there may be fees if you wish to sell, .. fees to 'import' your certificated holding into an account of some sort.


A 50 fee on a 5000 purchase would be 1%. There's 1% stamp duty fee payable on all Irish shares isn't there?, for comparision.


Is there anywhere the bond prices are updated more feequently than daily? The ISE only updates once a day (for Gov Bonds), or five times a week, pretty pathetic really.. even after registering as it said you'd see hourly updates.. there are still no hourly updates.


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## Gekko (8 Aug 2011)

JoeBallantin said:


> but NO TAX whatsoever on the capital appreciation


 
For the moment...


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## Sunny (8 Aug 2011)

JoeBallantin said:


> Yes, I gave approx fees earlier. You can buy for 50 minimum charge, no other fees. These are held in certificated form, and your bank details are lodged with the issuer of the bond.. the interest payments are made directly into your bank, as is the redemption amount. So there's there's only the original 50 Euro purchase fee, (through at least one stockbroker who offers that price, whom I have personally confirmed the price with.)
> 
> I think you pay tax on the interest payments, .. but NO TAX whatsoever on the capital appreciation. It's the capital appreciation that can represent good value.
> 
> ...


 
It's fair enough to be taking a punt on getting par back at maturity as long as you are fully aware the risks you are taking.

Also, bear in mind that if you are looking at yields, you need to be aware the published yields assume that you re-invest the coupons you receive at the same rate you invested in. Because of tax and the fact that you probably won't recieve the same return, your yield to maturity is lower than the published one. It also assumes you hold the bond to maturity.


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## Protocol (9 Aug 2011)

JoeBallantin said:


> I think you pay tax on the interest payments, .. but NO TAX whatsoever on the capital appreciation. It's the capital appreciation that can represent good value.


 

No CGT due by private individuals on gains made on Govt bonds?  Are you sure??


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## Sunny (9 Aug 2011)

Protocol said:


> No CGT due by private individuals on gains made on Govt bonds? Are you sure??


 
Yeah, there is no CGT liability of Government securities.

Gains realised on the following are not taxable:

*Irish government securities, including land bonds, prize bonds, savings certificates and bonuses payable under the National Instalment Savings Scheme*;
securities of local authorities, certain State-sponsored bodies and the European Union;
futures contracts based on government and other securities that are not chargeable assets for the purposes of capital gains tax;
life assurance policies and contracts for deferred annuities, unless purchased from another person etc.
chattels sold for €2,540 or less;
wasting chattels, such as private motor cars, animals;
winnings from betting, lotteries and sweepstakes;
gains accruing to superannuation funds, charities and certain bodies, such as local authorities and trade unions;
certain works of art valued at not less than €31,740 where they have been loaned to an approved gallery or the proposed Irish Heritage Trust for a period of not less than ten years for display to the public;
a gain on a dwelling-house (including grounds of up to one acre) where the house has been used as an individual’s only or main residence (or, under certain conditions, as the sole residence of a dependent relative) during the individual’s period of ownership. In certain circumstances there may be a restriction on the relief or partial relief may be due.


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