Tesco Bank launches inflation-linked bond
The Tesco Bank Retail Price Index (RPI) Bond will pay a bi-annual coupon of 1%, payable on 16 June and 16 December, which will be adjusted to take into account changes in the index.
The capital value will also be uprated in line with the RPI, which had a reading of 5.4% in October. This means at the end of the eight-year term, investors will get back the capital value of the bond plus any increases in RPI over the term.
Issued in multiples of £1, the bond has a minimum investment of £2,000, and can only be bought through stockbrokers and wealth managers. It can be held in Isas and Sipps.
Applications for the bond will close at 10am on 9 December and the bonds will begin trading on the stock market on 16 December.
Boon to savers
Phil Wong, a stockbroker at Redmayne-Bentley, says the new bond issue is a boon to savers worried about the eroding effects of inflation, adding that recent issues of inflation-linked products demonstrate ‘clear signs of demand' from retail investors.
Tesco Bank's launch comes after RBS unveiled a seven-year inflation-linked bond paying 2% adjusted for RPI.
Investors can buy and sell their Tesco Bank bonds at any time, however the price will fluctuate from the £1 issue price after it lists on 16 December.
Investors should remember that corporate bonds are not covered by the Financial Services Compensation Scheme (FSCS). If Tesco Bank defaulted, the income payments and capital could be at risk.
This article was written for our sister website Money Observer
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).