RPI linked bond scam

First there was National Grid, now Tesco.
The headline states something like: "Pays 1% adjusted for RPI". Joe Public takes that to mean pays RPI+1, which he thinks is great.
WRONG !!!! They pay 1% with a microscopic tweak depending on how RPI compares with ~6 months before the start of the bond - and inflation may well go down - so less than 1%.
Not for me. I'd rather take the guaranteed fixed term bond rates of the banks and BSs.
Don't be suckered in.
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the cynic wrote:

Not so. You need to read about it again:
http://www.thisismoney.co.uk/money/investing/article-2068160/Tesco-Bank-launches-RPI-inflation-beating-year-bond.html
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wrote:

Disagree. Please read info booklet, page 4 at: www.hl.co.uk/tesco If inflation REMAINS THE SAME, it pays 1%, and only returns capital.
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On 04/12/2011 15:46, the cynic wrote:

I suspect that your reply reflects a misunderstanding of the difference between inflation and RPI.
Inflation measures the short term (12 month) changes in prices - whereas RPI measures the *accumulated* changes over many months and years. So, if inflation is (say) 4% at the start of a year and only 3% at the end of the year, *inflation* will have gone down over the year but the *RPI* will still have risen by at least 3% - which is what this bond pays, in addition to the 1%.
Of course, if the RPI goes *down* you may get less than 1% - but that require *deflation* - not just a lower rate of *inflation*.
--
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Roger
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RPI table: <http://www.wolfbane.com/rpi.htm
--
Alan
news2009 admac myzen co uk
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wrote:

Hmmm. Maybe some humble pie here. Understood I have been thinking of inflation, rather than a progressive RPI number.
Reading more carefully the Info Book, page 4, I now conclude: 1. The 6 month payments remain at 1% per year (+/- a smidgen). 2. The main inflation adjustment comes at repayment on maturity in 2019.
So I'm considering it again, but would prefer a bond that simply paid inflation and returned unadjusted principal at maturity.
Thanks.
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the cynic wrote:

If inflation is minus 2% over a year, say, you'd be happy to receive a bill for that then?
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On 04/12/2011 13:19, the cynic wrote:

The front-page article in Saturday's FT (Money Section) suggests treating these new (Tesco, Nat Grid etc) index-linked corporate bonds carefully. Not to be confused with index-linked gilts (government bonds), or the (currently not on sale) NS&I index-linked certificates.
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Surely that's because the expectation is that inflation will move down soon, just at the point where other factors force "normal" interest rates up, so you'll be stuck in a badly performing bond for many years.
No I don't buy it, but that's the Government's expectation in their master plan for saving the economy.
tim
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It certainly looks to be a scam. It is extremely complex. You would need to be a Tesco banker to understand it, the one who devised the scheme. If you don't understand it, and most won't, don't invest.
| First there was National Grid, now Tesco. | | The headline states something like: "Pays 1% adjusted for RPI". | Joe Public takes that to mean pays RPI+1, which he thinks is great. | WRONG !!!! | They pay 1% with a microscopic tweak depending on how RPI compares | with ~6 months before the start of the bond - and inflation may well | go down - so less than 1%. | | Not for me. I'd rather take the guaranteed fixed term bond rates of | the banks and BSs. | | Don't be suckered in. |
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On 06/12/2011 12:21, Stickems. wrote:

No, it's not a scam - and even the OP now acknowledges that, now that he understands how RPI works.
--
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Roger
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wrote:

It's not a scam, but it is misleading. As I NOW understand it, it is NOTpaying inflation+1% every 6 months which the headline implies. It is paying 1% (+/- a smidgen) every 6 months, the main RPI adjustment at maturity in 8 years - so no compounding.
Last time I looked at the National Grid bond, it was trading at 101. So if you sell it, you ~ get your money back.
Not a very good deal IMHO.
What a pity the likes of Hargreaves Lansdown wont let us put fixed term bonds from the banks and BSs in our SIPPS. (They would get their 1% management fee.) In fact every cash deal in HL for our SIPPs has been very poor.
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It's quite normal that if you sell bonds early you don't get your money back.
It's how they work. If you want the headline deal you need to stay to maturity - or buy second hand ones :-)
tim
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need to

you

The RPI takes care of compounding. Assume that the RPI is now at 100 and inflation is 10%. Then in a year's time the RPI will be at 110 and in 2 years' time at 121, not at 120.

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<snip>

Agreed. Actually I thought of that shortly after previous posting.
I now understand these somewhat better than I first did - thanks to the NG.
Actually I consider these close to "zero coupon bonds" where the lender wants to repay most at the end of term - rather than continuously (eg every 6 months).
Also agreed they are saleable in the mid-term - but prob at less than full value in the mid-term. It depends when you want the money !
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