Recently, Tesco Bank has published information that it issues bonds which has a fixed rate interest of 5.2% gross each year. The bonds have a seven-year life (repay in 2018). The life time is relatively short compares with those who have 10 or even 20 years long. The face value is ￡100 and the minimum initial investment is ￡2,000. People only can gain the bonds from stockbrokers and check prices on LSE (London Stock Exchange) website.
Formerly, Tesco Bank was named Tesco Personal Finance (TPF) which was a banking joint venture. It owned by both Tesco and the Royal Bank of Scotland. In 2008, Tesco, Britain's biggest retailer, bought the whole Royal Bank of Scotland’s’ stake. Then TPF just owned by Tesco. In 2009, Tesco renamed it Tesco Banking. It main products are insurance, credit cards and personal loans, etc.
The fund is raised for Tesco Bank to launch of bank branches and mortgage ranges. Because Tesco is considered as stable company (one commenter (Kerrygold) even said: ‘I suspect the country will go broke before Tesco does.’), the bonds indeed attract many private investors. But what we should put in mind is that Tesco bank is a legally separate entity, Tesco’s subsidiary. The bond is not covered by the Financial Services Compensation Scheme. If Tesco Bank becomes insolvent, Tesco do not have the right to compensate you. In other word Tesco has no right of recourse. And no one else will give recourse. It just likes Tesco’s project finance and people should only consider Tesco bank separately from Tesco. However, some may think Tesco won’t let Tesco Bank go bust and it will put energy in it. People think it does not as risky as those traditional large banks and its bonds are worth to invest.
5.2% interest is higher than current banks’ 0.5% saving interest. Also bonds are considered less risky than shares. So it is good for those conservative investors or people who will retire soon to hold the bonds and get fixed return. The main matters are that the value of cash may fall due to the inflation and seven years later. If the discount value is at 5%, then after seven years, ￡100 only value at ￡26! If add the interest only ￡35 left. Also the bank’s saving interest may raise and then it will be no worth for us to put money in the bonds. Fortunately, you can buy and sale it whenever you like at the second market.
Personally, we can put Tesco Bank bonds in our portfolio to reduce the risk. Although the bonds’ value may fall, it is better for us to save money in bank if bank interest remains at 0.5%. We can buy shares, bonds, also a certain part of our money in the bank. Then if Tesco Bank go bust, we will not lost all of our money.
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How did you arrive at £26 after seven years? also.. you seem to imply that even if we add back the interest earned.. we will only get £9 extra (£35 in total)... Are you sure? If your figures are right then what would 0.5% interest give you (instead of Tesco's 5.2%)?
ReplyDeleteI agree with Ken, I'm not sure about the figures.
ReplyDeleteBut as you propose, Tescos would surely not allow their bank subsidiary to fall, however I believe Tescos are smarter than allow a loss making subsidiary to continue?
Or wouldn't Tesco's at least have a high level of expertise within it's banking department to allow for these bond investments to not make a loss on
the larger bond markets?
I agree bond investment has less risk than entering the share market, and am I right to think you can obtain bonds which are fixed interest, meaning the risk is even less?
Oh, I have made a mistake. I have corrected the error now. If the discount value is at 5%, then after seven years, ￡100 will be valued at about ￡71.1 If add the interest the investors can have the value of ￡101.2 Thank you for reminding me of the mistakes~~
ReplyDeleteKelly: Tesco can have strong power to make Tesco Bank operating well. But it is hard to say what will happen seven-year later. The business environment is changing and the companies's situation is also changing. Just like Nokia, it used to be the world's leading mobile phone supplier but now it is not.
I agree the fixed interest bonds have less risk than the float interest bonds. It has low risk and it is relatively safe for us to invest in. I have also made a mistake in my blog saying: 'it is better for us to save money in bank if bank interest remains at 0.5%.' actually I mean it is better for us to buy the bonds than put money in the bank if the bank interest remains at 0.5%.