12k for the long term

Leiva

Hi,

Have closed off a couple of accounts and have 12k available to put away for the long term 10yrs +

I was looking at the new Govt saving bond which guarantees 50% after 10yrs.

Any suggestions welcome.

Ta
L.

MrMatisse

Dont go near it!!

You can get government bonds in the market that yield almost 10% annually with the same guarantee as far as I can see.

Leiva

MrMatisse wrote: »

Dont go near it!!

You can get government bonds in the market that yield almost 10% annually with the same guarantee as far as I can see.

Cheers..

Can you point a complete novice to a certain product/info

Isoaxe

As it happens, I conducted some research on behalf of a friend who had holdings in prize bonds a few months ago.

I called up the National Treasury Management Agency (NTMA) for information on which retail brokers deal in Irish government debt, and the guy directed me to the following PDF he created (see attachment).

In addition, I quizzed him on the level of seniority that these bonds offer when compared to prize bonds and the government so-called 'solidarity' bonds. He said they were all backed by the Irish government to the same level, and would be treated the same in the event of default/restructuring. So MrMatisse is correct in his previous post.

So buying debt on the open market yielding 10% over 10 years gives a cumulative 259% return (ignoring taxes and transaction fees). Obviously a much better deal than 50% directly from the government (which is still taxed, albeit at a lower rate).

As for transaction fees, Bloxham charge €100 for the purchase of the bonds, and no annual management fee. So that's €100 total for ten years, which seems reasonable.

Hope that helps!

Isoaxe

I don't think the attachment worked, here's the hyperlink.

Leiva

Isoaxe wrote: »

I don't think the attachment worked, here's the hyperlink.

How exactly does this work .

Do you just invest the total money ( €12k in my case) and they manage it over a defined term or do I have to micro manage it on a weekly basis ?

I really am green when it comes to things like this .

M

Isoaxe

Yeah, pretty much. There's no 'managing' of the bonds per se. You purchase them through the broker, and they keep them in your brokerage account. Coupon payments are made by the government on a semi-annual basis, and on maturity the face value is credited to your account.

Another reason to buy from the open market (apart from the huge interest rate differential) is that you can buy bonds with different maturity dates. Say you want your money back in 10 years. Then it would be advisable to buy a 10 year bond so that the cash is returned after 10 years. If you were to buy, say, a 30 year bond then you could still technically hold onto it for 10 years and sell it on the market with 20 years remaining. If yields were to drop in the interim, you would actually make more than the amount suggested by the yield at which you purchased the bond. The reverse is also true- rising yields would result in a smaller return. Hence buying a bond for the precise maturity required hedges against yield fluctuations.

A final point is that the government will penalise you for withdrawing your money early (in the form of a much reduced interest rate). The market will not (though there is the bond yield risk as mentioned in the previous paragraph).

Leiva

Isoaxe wrote: »

Yeah, pretty much. There's no 'managing' of the bonds per se. You purchase them through the broker, and they keep them in your brokerage account. Coupon payments are made by the government on a semi-annual basis, and on maturity the face value is credited to your account.

Another reason to buy from the open market (apart from the huge interest rate differential) is that you can buy bonds with different maturity dates. Say you want your money back in 10 years. Then it would be advisable to buy a 10 year bond so that the cash is returned after 10 years. If you were to buy, say, a 30 year bond then you could still technically hold onto it for 10 years and sell it on the market with 20 years remaining. If yields were to drop in the interim, you would actually make more than the amount suggested by the yield at which you purchased the bond. The reverse is also true- rising yields would result in a smaller return. Hence buying a bond for the precise maturity required hedges against yield fluctuations.

A final point is that the government will penalise you for withdrawing your money early (in the form of a much reduced interest rate). The market will not (though there is the bond yield risk as mentioned in the previous paragraph).

Thanks Again .

Out of the .PDF you attached have you ever dealt with any of the Brokers ?
If so who can you recommend ?

Isoaxe

No sorry, unfortunately I haven't. But, as I said in an earlier post, bloxham have the most competitive fees for your specific situation. I would recommend working out the total fees charged by each for your capital and timeframe, and then making a phone call to 2 or 3 cheapest ones. Explain your situation and see what you think of what they have to say.

Remember that if you're just leaving the cash there for 10 years and forgetting about it, customer service isn't really that important. Overheads are.

You could also start a new thread listing the brokers and asking if anyone has had any experience with them. Do a search for a similar thread on boards first though.

waitingforBB

"If yields were to drop in the interim, you would actually make more than the amount suggested by the yield at which you purchased the bond. The reverse is also true- rising yields would result in a smaller return. Hence buying a bond for the precise maturity required hedges against yield fluctuations."

Sorry I dont follow the above. If I buy a bond with a say 10% coupon and retain that to maturity, how to fluctuating yields impact my return? (unless I was to sell the bond on pre maturity, where the value I would get may not be close to par value dependent on potential for default etc?)

Novice here so perhaps I've misunderstood

Isoaxe

waitingforBB wrote: »

"If yields were to drop in the interim, you would actually make more than the amount suggested by the yield at which you purchased the bond. The reverse is also true- rising yields would result in a smaller return. Hence buying a bond for the precise maturity required hedges against yield fluctuations."

Sorry I dont follow the above. If I buy a bond with a say 10% coupon and retain that to maturity, how to fluctuating yields impact my return? (unless I was to sell the bond on pre maturity, where the value I would get may not be close to par value dependent on potential for default etc?)

Novice here so perhaps I've misunderstood

What I was referring to there was selling a bond pre-maturity, as the previous line was

"If you were to buy, say, a 30 year bond then you could still technically hold onto it for 10 years and sell it on the market with 20 years remaining."

So you're right, fluctuating yields don't affect the return if the bond is retained until maturity.

gOst

I apologise in advance for being particularly dense .

10 year bonds currently yield close to 10%. This is where I need the clarification, once the bonds are bought does the yield % remain fixed for the duration of the bond life (10years)? Its stated in another post the coupon payments are made every 6 months, what would these payments amount to?

I suppose the main thing I would like to know is if I input €10,000 into 10 year government bonds at their current rate, what is the output in 10 years time?

Am I right in assuming the reason for a high yield is because of the Ireland's bad credit rating and associated increased risk of default.

I'd appreciate it if any more enlightened individuals could clarify any of the above points? Thanks

OfflerCrocGod

The yield is fixed based on the price you purchase them at in the market. So if you buy them and they yield 10% they will yield 10% for the entire 10 year period, their actual nominal yield might only be 4.5% but due to their price collapsing in the market their current yield is ~10%.

Bonds are first issued in the market at "par" i.e. the face value of the bond (actually they can be first sold at any price I'm just simplifying). So a €100 bond that pays a yearly coupon of 4.5% will pay €4.5 a year and that amount never varies. What can vary is the price of the bond, in other words the bond will trade around 100/"par" unless something happens to make the market change its mind about the current yield of the bond i.e interest rate rises or bond issuers credit rating is cut.

Ireland is seen as risky credit so its bonds trade at below par, "under par" or "discount to par". So for example if the bond trades at 70 the yield is no longer 4.5% but the coupon is still €4.5 though it's just that €4.5 of 70 is a far higher yield then €4.5 of 100.

Does that help?

Isoaxe

OfflerCrocGod wrote: »

Ireland is seen as risky credit so its bonds trade at below par, "under par" or "discount to par". So for example if the bond trades at 70 the yield is no longer 4.5% but the coupon is still €4.5 though it's just that €4.5 of 70 is a far higher yield then €4.5 of 100.

Does that help?

Also factored into that calculation if the expectation of receiving the face value of the bond back at maturity. So the yield is €4.50 on €70 plus the yearly fraction of €30 amortized over 10 years.

OfflerCrocGod

Isoaxe wrote: »

Also factored into that calculation if the expectation of receiving the face value of the bond back at maturity. So the yield is €4.50 on €70 plus the yearly fraction of €30 amortized over 10 years.

Yes the prices quoted would normally be Yield To Maturity.

gOst

With increasing talk of Irish default and possibly leaving the euro what implications does that have on bonds.

I know a bond is basically a loan or IOU from whatever entity you get it from. But is there any other order of preference in terms of repayment, I'm not sure but is that called the seniority of the bond holder?:o
Can the government just decide to burn everyone who have purchased irish bonds.

Also am I correct in assuming that if we go back to the punt, the conversion will result in conversion of bond values aswell. I'm not sure if i'm explaining myself very well but hypothetically speaking.

if I had €1000 worth of bonds due to mature in 10 years, and by then we had left the euro, the face value which I would receive would be in punt i.e. 1000 punt, which wouldn't be of equal value of the €?

As this whole economic **** storm rages on, I'm amazed at the complexity of the economics. And how its seems 1% mathematics and 99% psychology. Physically the €1 million house in 2007 is the exact same as the €250,000 house now, all thats changed is peoples perception of it worth.

Thanks again for the info so far.

OfflerCrocGod

People made a mistake valuing the homes in question, houses like all good assets are valued based on their yield. The yield is the rent you can get for the house.

A €1 Million home that you can rent for €15K is not worth €1M.

It's not psychology it's common sense.

Black Rock

In line with the normal practice in the sovereign debt markets, Ireland has never issued any debt with either a preferred status or a subordinated status relative to any other debt it has issued, i.e. all debt issued by Ireland ranks pari passu and enjoys identical status.

From a risk perspective there is no difference between the "NTMA State Savings" products offered to personal savers and the other wholesale Irish Government Bonds offered to institutional / corporate investors.

However there are other differences in respect of taxation and early encashment that you need to consider when comparing the wholesale Irish Government Bonds offered to institutional / corporate investors to the range of NTMA State Savings™ products suited to personal savers.