Bank shares vs bonds

Hector House

Registered User
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Hi all,
A very basic question, but what is the difference between having shares in an Irish bank and having a bond (which pays out twice yearly)?

Any light that could be shed on this would be most welcome.
 
Bonds?? Very broad animal from unit linked to Tracker to deposit to secured to subordinated to perpetual.

I will presume that you are describing some sort of long dated debt instrument issued by the bank which ranks after normal deposits in a winding up and which pays semi annual coupons calculated on the nominal value of the bonds for some term and then the nominal value is repaid at maturity.

Shares are "equity" i.e. they get what's left after all creditors have been paid their interest and after all expenses, and in the case of a winding up they get what's left, if anything, after all creditors including bondholders have been paid. They are the last in line and so are in a sense super geared - if things go well they get magnified returns and if they do bad they tank.

A "vanilla" bond should get exactly what it says on the tin e.g. 6% p.a. for 10 years and then the nominal repaid, unless there is an insolvency beforehand in which case bondholders join the queue behind depositors but of course ahead of shareholders. Prior to maturity bonds can be traded in the market, which will reflect the underlying terms but using current interest rates and also having regard to the possibility of default and so the market value will usually differ from the nominal value, it can be higher or lower. Credit agencies specialise in quantifying the risk of default. Despite recent negative vibes all the main Irish banks have solid credit ratings for their long term debt (bonds).
 
A bond pays a fixed amount of interest once or twice a year and is redeemed or paid back by the issuer at a fixed time in the future. The price of the bond depends on interest rates - it will go up as rates go down and will go down when interest rates go up. There is a risk that the issuer will default on the interest payments and/or on the final pay back.

A share is the right to a share in the profits made by the bank. If the bank makes a lot of profit, it may pay a dividend. If it makes none or a loss, it will probbly reduce or forego the dividend payment. The value of the share is determined by the demand for the share in the financial markets. If the bank goes bust, then the share will become worthless.
 
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