Tesco Bank launches fixed-rate bond paying 5%
Tesco Bank, the retail banking arm of the supermarket giant, has unveiled a fixed-rate bond paying 5%.
The bond, which has a maturity of eight and a half years, is the third corporate bond aimed at retail investors that the bank has launched over the past two years.
At the end of last year, Tesco Bank launched an inflation-linked bond paying the Retail Prices Index plus 1%, which raised £60 million in funding, while the group's 5.2% fixed-rate offering, launched in February 2011, raised £125 million.
This fixed-rate offering, which matures on 21 November 2020, will pay an annual coupon of 5% twice a year, starting from 21 November this year.
The new bond is expected to list on the London Stock Exchange's Order Book for Retail Bonds. It will be available through stockbrokers and wealth managers, and the minimum investment is £2,000.
Benny Higgins, chief executive of Tesco Bank, comments: "Retail bonds form an important part of our funding strategy as we move towards offering a full retail banking service for Tesco customers."
Applications for the bond open on 2 May, and close on 21 May.
The Tesco Bank bond comes just two days after luxury travel group Mr & Mrs Smith launched a fixed-rate four-year bond paying 7.5%.
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 of the bond could be at risk.
This article was written for our sister website Money Observer
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).
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.