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National Grid To Offer First Inflation-Linked Bond Open To Public

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http://www.telegraph.co.uk/finance/newsbysector/energy/8760626/National-Grid-to-offer-first-inflation-linked-bond-open-to-public.html

Traditionally, such inflation-linked bonds are just available to major institutional investors, but National Grid is taking advantage of the low rates of interest to raise between £50m and £140m.

National Grid's new 10-year bond, which requires a minimum £2,000 investment, will have an annual interest rate of 1.25pc above the rate of inflation, as measured by the Retail Price Index (RPI). There is currently not a single savings account available that beats RPI at 5.2pc.

The new bond will offer two cash interest payments each year and the final repayment at maturity will reflect the compound effects of inflation. However, if RPI has fallen by maturity, the company will pay back no less than the face value of the bonds.

Retail bonds are considered more risky than bank accounts because they are not covered by depositor guarantee schemes in case of default by the issuer.

An interesting investment for those willing to take more of a risk.

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Just had a quick look at the prospectus http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf and I think the telegraph article may be misleading. Way I read it, coupon (initial rate of interest) appears to be simply 1.25%, NOT RPI+1.25% . On an investment of £2000 that is £12.80 every 6 months. The coupon rate will rise with inflation. In the example given, if RPI was 5% then on an investment of £2000 the 6 monthly interest payment would rise from £12.80 to £13.20 next year etc etc. Then in October 2021, assuming NG does not default, you get back a minimum of the original £2000 plus an adjustment for inflation. Maybe you can add these things together and come up with an overall interest rate of RPI+1.25% over the life of the bond but that doesn't sound hugely attractive to me

edit: 2021 not 2011

Edited by nice tuna sandwich

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Just had a quick look at the prospectus http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf and I think the telegraph article may be misleading. Way I read it, coupon (initial rate of interest) appears to be simply 1.25%, NOT RPI+1.25% . On an investment of £2000 that is £12.80 every 6 months. The coupon rate will rise with inflation. In the example given, if RPI was 5% then on an investment of £2000 the 6 monthly interest payment would rise from £12.80 to £13.20 next year etc etc. Then in October 2021, assuming NG does not default, you get back a minimum of the original £2000 plus an adjustment for inflation. Maybe you can add these things together and come up with an overall interest rate of RPI+1.25% over the life of the bond but that doesn't sound hugely attractive to me

edit: 2021 not 2011

Thanks for the info.

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Retail bonds are considered more risky than bank accounts because they are not covered by depositor guarantee schemes in case of default by the issuer.

I do hope Joe Public if they invest are well aware of that and exactly what it means.

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Needs an early redemption option to be really of interest to individuals but it's nice to see corp bonds becoming available to Joe Public.

They can be sold at any time in the bond market.

The Selftrade analyst expects them to go to a premium after launch.

http://www.selftrade.co.uk/external.php?url=http%3A%2F%2Ffixedincomeinvestor.selftrade.co.uk&m=073398562d97726b53ad5e485f8b9ed4

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Just had a quick look at the prospectus http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf and I think the telegraph article may be misleading. Way I read it, coupon (initial rate of interest) appears to be simply 1.25%, NOT RPI+1.25% . On an investment of £2000 that is £12.80 every 6 months. The coupon rate will rise with inflation. In the example given, if RPI was 5% then on an investment of £2000 the 6 monthly interest payment would rise from £12.80 to £13.20 next year etc etc. Then in October 2021, assuming NG does not default, you get back a minimum of the original £2000 plus an adjustment for inflation. Maybe you can add these things together and come up with an overall interest rate of RPI+1.25% over the life of the bond but that doesn't sound hugely attractive to me

edit: 2021 not 2011

In other words, a real rate of return of 1.25%pa if held to maturity (ignoring credit risk). Please read up on index linked bonds if you don't understand them. Also, please read about the difference between the Retail Price Index and the rate of inflation.

edit (forgot the "pa")

Edited by davidcameron

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It's a good idea - they're cutting out the banking middle men.

I found this bit interesting:

Retail bonds are considered more risky than bank accounts because they are not covered by depositor guarantee schemes in case of default by the issuer.

This is one of the unintended consequences of depositor guarantees. If neither had a guarantee, you could judge them on merit (i.e. casino banking vs infrastructure investment etc). In short, depositor guarantees play into the hands of the bankers, while leaving the taxpayer on the hook if they screw up.

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  • 343 Brexit, House prices and Summer 2020

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      • down 5% +
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