Inflation linked 5 year bond (BOI, Eddie Hobbs)

BrianD3

Not a fan of Eddie but I'm considering this bond which he claims to have helped design. Anyone got any thoughts on it?

http://www.inflationbond.ie/dib.html
http://www.independent.ie/business/irish/no-risk-in-inflationlinked-deposit-account-designed-by-hobbs-2812776.html

A 5 year bond which is capital guaranteed by Bank of Ireland and which tracks Eurostat inflation.

Charges are:

Bloxham is paid a fee of 0.5% of the initial investment amount as the Double Inflation Bond issuer and Mount Street Group is paid 3.5% for the design and structuring ofthe Bond. This fee does not affect the 100% capital security or the inflation based return.

In the brochure there are a few sample returns based on inflation rates of -2%, 2%, 4% and 6%. If 10,000 is invested the net maturity value after 5 years and assuming DIRT of 30% will be
-2% inflation p.a. - 10,000
2% inflation p.a. - 11,457
4% inflation p.a. - 13,033
6% inflation p.a. - 14,735

Presumably the 0.5% and 3.5% (of the initial investment) come off all of the above. In the case of zero or negative inflation these charges will then result in a net loss?

edit: I've just noticed that there is already a thread about it in the banking forum. Mods, please move or merge my thread if you deem it appropriate to do so.

OfflerCrocGod

Seems to me ECB is going to happily drive us off the cliff into deflation again so I wouldn't see why an inflation linked instrument is attractive in the €-zone.

IrionDevral

This kind of product is really just a bond / deposit account plus an option. So at the start your money is used to buy the bond and the option with whatever is left over being the charge. When the bond matures it provides the return on your investment so even if inflation is zero you'll get back what you put in. Of course that assumes BOI is in a position to make good on it.

As OfflerCrocGod said I can't see the ECB letting inflation get out of control in Euroland. Their target is 2% so you're porbably looking at about 4% return a year on this product.

BrianD3

IrionDevral wrote:

so even if inflation is zero you'll get back what you put in

Are you saying that there won't be any charges if inflation is zero or negative?

Bloxham is paid a fee of 0.5% of the initial investment amount as the Double Inflation Bond issuer and Mount Street Group is paid 3.5% for the design and structuring ofthe Bond. This fee does not affect the 100% capital security or the inflation based return.

panacea

"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 ....."

Quite a striking difference between my understanding of 100% capital security and the reality of the situation - if you click on the Investment Security tab this gives paints a less than robust picture of the strength of this claim (see below).

"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."

Notwithstanding the underwriters own caveat above, the cost of living in Ireland over the period is likely to be significantly higher than the EU average rate of inflation (particularly if recent increases in VHI / Energy costs / Insurance Premiums / Fuel costs and other day to day costs are anything to go by) and possibly even higher than the EU average +2% less taxation which makes this product less than compelling.

Locking in at the kind of rate this bond appears to offer for 5 years doesnt look too attractive if higher interest rates are likely to materialise over the 5 year period given that we are likely to see another couple of interest rate hikes over the next 6-12 months and possibly even more over the following 4 years if the ECB really dig their heels in trying to contain inflation across the Eurozone close to 2%.

With Irish Govt bonds trading above 12% I would take lead from their expertise on what kind of return I would accept in exchange for a guarantee from and Irish institution for 5 or 10 year money.

Can seem to see anything on early encashment but their could be penalties if you needed unforeseen access to your cash.

OfflerCrocGod

Cost of living in Ireland has been lower then most of the €-zone for the last 2+ years and I would expect it to stay that way as we deflate the bubble away and people keep paying of their debts and house prices continue their slide downwards.

Especially with rates going up making debt payments harder.

panacea

OfflerCrocGod wrote: »

Cost of living in Ireland has been lower then most of the €-zone for the last 2+ years

Not so according to EuroStat.

Even comparing 2010 price levels for consumer goods and services we still come out relatively high across the EU27. Ranked 7 in 2010 but even higher placed at 5th most expensive in years prior to 2010.

That is only for consumer goods and services, factor in the rest of what you spend your money on together with increased direct and indirect taxes and I dont believe we would necessarily become comparatively cheaper.

Price level indices for consumer goods and services, 2010:
http://europa.eu/rapid/pressReleasesAction.do?reference=STAT/11/95&format=HTML&aged=0&language=EN&guiLanguage=en

OfflerCrocGod

Sorry not cost of living I meant inflation rates.