Double Inflation Bond - Eddie Hobbs
- Thread starter Dogsbody
- Start date
Ok, some more info. This is a capital guaranteed investment bond offering from Bank of Ireland which undertakes to return 100% of your capital after five years plus double the rate of inflation for the five year period. It also falls under the government guarantee scheme.
M
mercman
Guest
I've said it before and I'll say it again. On the basis of what we all know on how the Irish Banks made complete idiots of the Government and the Irish people, how in heaven's name can people want to invest money with such a crowd. I haven't read the prospectus on this product,(don't really want to) but there is bound to be a catch. People of Ireland -- wake up and don't go down a road of headaches and stress. Bank's business is lending money and taking in deposits - not investment products.
You make a good point mercman,but it doesnt mean we cant investigate these type of products and try to understand whats on offer and how they intend to give a return.Just because people ask some questions doesnt mean that everybody is going to run into a bank waving a cheque.If the banking crisis has taught us anything its to look more closely at any transaction we have with any of the banks.
More info....plus links...
"The Double Inflation Bond is a fixed term investment which provides 100% capital security and a return equal to twice the rate of inflation in the EU experienced over the term of the Double Inflation Bond with no upper limit. The investment amount received is placed in a deposit with Bank of Ireland. Bank of Ireland will return 100% of the capital plus double the rate of inflation over the five year period."
Minimum invest - €10,000. Locked in for 5 years. After 5 yrs, what you get back is 100% of capital invested plus double the rate of inflation, minus whatever the rate of DIRT is at that time...
More info at [broken link removed]
I like the last part....
"Capital security is provided by Bank of Ireland. If Bank of Ireland defaults or becomes insolvent, neither Bloxham nor Mount Street Group are liable for the repayment of the principal and/or the payment of the interest."
"The Double Inflation Bond is a fixed term investment which provides 100% capital security and a return equal to twice the rate of inflation in the EU experienced over the term of the Double Inflation Bond with no upper limit. The investment amount received is placed in a deposit with Bank of Ireland. Bank of Ireland will return 100% of the capital plus double the rate of inflation over the five year period."
Minimum invest - €10,000. Locked in for 5 years. After 5 yrs, what you get back is 100% of capital invested plus double the rate of inflation, minus whatever the rate of DIRT is at that time...
More info at [broken link removed]
I like the last part....
"Capital security is provided by Bank of Ireland. If Bank of Ireland defaults or becomes insolvent, neither Bloxham nor Mount Street Group are liable for the repayment of the principal and/or the payment of the interest."
M
mercman
Guest
Good point, but I am only trying to offer an opinion as to what others might be letting themselves in for. Why do you think the BoI were instructed to sell BIAM and New Ireland Assurance. I personally have been to hell and back with Investment products from BoI and its subsidiaries and have vowed never to invest in a Financial product originating in Ireland.
But you are correct, have a look around and check what is on offer, but when and if it goes pear shaped remember 'mercman' told you so. And i do not wish any malice to any private individual.
ringledman
Registered User
- Messages
- 620
Points to consider -
1) Measured against the inflation rate of the eurozone, not what inflation will be in Ireland over the next 5 years. This could work out well or not so.
3) Costs - As per the prospectus-
We earn 0.75% p.a. (3.5% up front) for distributing and administering the product over the 5 year term.'
1) Measured against the inflation rate of the eurozone, not what inflation will be in Ireland over the next 5 years. This could work out well or not so.
3) Costs - As per the prospectus-
'How much do you earn?
We earn 0.75% p.a. (3.5% up front) for distributing and administering the product over the 5 year term.'
M
mercman
Guest
That equates 5.75% -- not bad for doing nothing apart from watching customers investment.
The bond pays double the rate of inflation as calculated by Eurostat’s harmonized consumer price index at the European level. The ECB target rate for inflation is 2%, so if the the ECB does its job the expected return for the bond is 2 X 2 = 4%, before DIRT, with the capital guarantee from the product provider. The Best Buys thread http://www.askaboutmoney.com/showthread.php?t=101813
shows that if you invest in State Savings for 5 ½ years you get 4.83% interest and your deposit is guaranteed by the State. Also there are no costs, commissions, etc. with State Savings. So if you believe the ECB will reach its inflation target putting your money in the Post Office savings certs should equal or beat this bond.
Since you are investing in a product and as such are not putting you money on deposit with the bank, I have some doubt about it being covered by the Government scheme.... Also the following statement on the website does not sound very comforting:
"Capital security is provided by Bank of Ireland. If Bank of Ireland defaults or becomes insolvent, neither Bloxham nor Mount Street Group are liable for the repayment of the principal and/or the payment of the interest."
Jim
One of the main drawbacks with structured products like this is that it is guaranteed but who is providing that guarantee? In this case it is Bank of Ireland or more precisely effectively YOU and ME as taxpayers. You are providing your own guarantee here. Interesting concept.
Your counter party to the contract is Bank of Ireland so you have a promise of your money back based on a BBB+ credit rating (that attaching to the Irish State) so what return does the Market require to take on that risk?
Well if I look at Irish government bonds maturing in 2016 with a coupon of 4.6% the current price on the Irish Stock Exchange is €72.94 so I get a yield to maturity of around 12%pa (interest payments plus capital gain) from buying this bond. Don't forget that capital gains on Irish government securities are also tax free for individuals although interest is taxable at marginal rates making this calculation slightly more complex for non pension investors.
So if I put €56.74 into this bond in 5 years I would have €100 back as an absolute minimum provided Ireland doesn't default on it's debts. That leaves me €43.26 in every €100 to invest in a portfolio of investments to attempt to obtain a return of twice the average rate of inflation over the next 5 years. No lock in for 5 years I am free to buy and sell as I see fit.
This is how someone could think about how they might construct a DIY version of this product without taking on anymore default risk than using BOI as a counter party to the contract.
For the avoidance of doubt I am NOT recommending anyone goes and puts half their capital in a Irish Bond expecting to get all their capital repaid in 2016 without some risk of a restructuring of either interest payments capital or both.
But the point is that anyone with a calculator and access to the Irish Stock Exchange can work out what the Market sees as the expectation of a "fair" interest rate for Ireland's credit worthiness and over this term the market says I want 12%pa for my money.
Now have another look at this contract.
Your counter party to the contract is Bank of Ireland so you have a promise of your money back based on a BBB+ credit rating (that attaching to the Irish State) so what return does the Market require to take on that risk?
Well if I look at Irish government bonds maturing in 2016 with a coupon of 4.6% the current price on the Irish Stock Exchange is €72.94 so I get a yield to maturity of around 12%pa (interest payments plus capital gain) from buying this bond. Don't forget that capital gains on Irish government securities are also tax free for individuals although interest is taxable at marginal rates making this calculation slightly more complex for non pension investors.
So if I put €56.74 into this bond in 5 years I would have €100 back as an absolute minimum provided Ireland doesn't default on it's debts. That leaves me €43.26 in every €100 to invest in a portfolio of investments to attempt to obtain a return of twice the average rate of inflation over the next 5 years. No lock in for 5 years I am free to buy and sell as I see fit.
This is how someone could think about how they might construct a DIY version of this product without taking on anymore default risk than using BOI as a counter party to the contract.
For the avoidance of doubt I am NOT recommending anyone goes and puts half their capital in a Irish Bond expecting to get all their capital repaid in 2016 without some risk of a restructuring of either interest payments capital or both.
But the point is that anyone with a calculator and access to the Irish Stock Exchange can work out what the Market sees as the expectation of a "fair" interest rate for Ireland's credit worthiness and over this term the market says I want 12%pa for my money.
Now have another look at this contract.
“They [structured products] are horrible investments for retail investors…Simple portfolios of bonds, stocks will beat structured products 99.5 percent of the time because of the heavy profit built into the pricing”
- *Craig McCann, former SEC economist and founder of Securities Litigation & Consulting Group
At first glance, structured products may look enticing; after all, they offer you some upside and protection on the downside. What could be so bad about that?
Perhaps the very first principle of investing is that there is no such thing as return without risk. No free lunches risk can never be obliterated; it can only be transferred from one party to another. If your broker is offering you a product that promises partial upside of the market with downside protection, you can be absolutely sure that the party that has agreed to take on the downside risk on your behalf is being paid to bear that risk, so the question you should naturally ask is, “Who is paying this party to take on my risk?” The answer, of course, lies in the mirror, but the true costs are not transparent. The cost may show up at the end as a much lower return than would have been received in a boring index fund.
One of the key points to understand about structured products is that they are constructed out of positions in the Market and the issuer of the structured product, after collecting your payment, will buy these building blocks at a lower price and pocket the difference as immediate profit, after paying your broker his commission.
Structured products carry default risk of the issuing company. Buyers of Lehman Principal Protected Notes have had to swallow this bitter pill. So even though structured products may appear to provide market-based returns, investors in these products are actually staking their nest egg on the fortunes of just one company. This is always a bad idea!
An additional problem with structured products is liquidity. The hapless investor who needs to sell one before maturity should expect a bad investment experience.
- *Craig McCann, former SEC economist and founder of Securities Litigation & Consulting Group
At first glance, structured products may look enticing; after all, they offer you some upside and protection on the downside. What could be so bad about that?
Perhaps the very first principle of investing is that there is no such thing as return without risk. No free lunches risk can never be obliterated; it can only be transferred from one party to another. If your broker is offering you a product that promises partial upside of the market with downside protection, you can be absolutely sure that the party that has agreed to take on the downside risk on your behalf is being paid to bear that risk, so the question you should naturally ask is, “Who is paying this party to take on my risk?” The answer, of course, lies in the mirror, but the true costs are not transparent. The cost may show up at the end as a much lower return than would have been received in a boring index fund.
One of the key points to understand about structured products is that they are constructed out of positions in the Market and the issuer of the structured product, after collecting your payment, will buy these building blocks at a lower price and pocket the difference as immediate profit, after paying your broker his commission.
Structured products carry default risk of the issuing company. Buyers of Lehman Principal Protected Notes have had to swallow this bitter pill. So even though structured products may appear to provide market-based returns, investors in these products are actually staking their nest egg on the fortunes of just one company. This is always a bad idea!
An additional problem with structured products is liquidity. The hapless investor who needs to sell one before maturity should expect a bad investment experience.
Brendan Burgess
Founder
- Messages
- 53,747
I hadn't heard of this bond until I heard Eddie advertising it on the radio this evening.
I think that the basis of the bond is that Eddie expects inflation to rocket and this bond provides protection against that. So if the Euro inflation index is 30% higher in 5 years, you will get a return of 60%.
But as Marc has said, if you want this sort of protection, make up a DIY tracker.
Not many of us would be prepared to put money away in Bank of Ireland for 5 years. So you can buy the 5 year protection against inflation and decide where is the best place to deposit the balance.
Brendan
I think that the basis of the bond is that Eddie expects inflation to rocket and this bond provides protection against that. So if the Euro inflation index is 30% higher in 5 years, you will get a return of 60%.
But as Marc has said, if you want this sort of protection, make up a DIY tracker.
Not many of us would be prepared to put money away in Bank of Ireland for 5 years. So you can buy the 5 year protection against inflation and decide where is the best place to deposit the balance.
Brendan
Hey Marc, thanks for the explanation, I still don't get it.
Well if I look at Irish government bonds maturing in 2016 with a coupon of 4.6% the current price on the Irish Stock Exchange is €72.94 so I get a yield to maturity of around 12%pa
How exactly does 4.6% become 12%pa?
Can you also tell me, if I was to stick 50,000EURO in Irish government bonds, what would I have at the end of it? and how do you work it out?
Cheers.
This is the crux of investing in bonds.
What I calculated was the yield to redemption.
Bonds are issued in at a price of 100 but the price is almost never 100 except when they are redeemed.
So the return is made up of two parts the coupon which is fixed for the full term and the gain or loss to redemption.
If a bond is trading above 100 an investor expects a capital loss to maturity whereas for a bond trading below 100 an investor expects a capital gain.
This gain expressed as an annual percentage is added to the coupon to give the total interest an investor expected until the maturity date.
In the case of the example the bond is trading at 70 something so the total return expected comes to 12%.
The next question is why?
The answer as we all now know is the risk that the Irish government might not give an investor back 100 on maturity.
The risk of some form of default means that the bonds are trading at a discount.
Investors attracted by the high return should understand the risk. The State could extend the maturity of these bonds meaning that the investor will take longer to be repaid their capital for example.
So in your example if you were to stick 50k in Irish government bonds what you could be left with ranges from nothing (at the extreme) or 50k plus interest payments between now and maturity.
The bond Market clearly isn't something the amature investor should be playing.
What I calculated was the yield to redemption.
Bonds are issued in at a price of 100 but the price is almost never 100 except when they are redeemed.
So the return is made up of two parts the coupon which is fixed for the full term and the gain or loss to redemption.
If a bond is trading above 100 an investor expects a capital loss to maturity whereas for a bond trading below 100 an investor expects a capital gain.
This gain expressed as an annual percentage is added to the coupon to give the total interest an investor expected until the maturity date.
In the case of the example the bond is trading at 70 something so the total return expected comes to 12%.
The next question is why?
The answer as we all now know is the risk that the Irish government might not give an investor back 100 on maturity.
The risk of some form of default means that the bonds are trading at a discount.
Investors attracted by the high return should understand the risk. The State could extend the maturity of these bonds meaning that the investor will take longer to be repaid their capital for example.
So in your example if you were to stick 50k in Irish government bonds what you could be left with ranges from nothing (at the extreme) or 50k plus interest payments between now and maturity.
The bond Market clearly isn't something the amature investor should be playing.