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.
Not so. You need to read about it again:
Disagree. Please read info booklet, page 4 at:
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*.
In message , Roger Mills wrote
RPI table:
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:
So I'm considering it again, but would prefer a bond that simply paid inflation and returned unadjusted principal at maturity.
Thanks.
If inflation is minus 2% over a year, say, you'd be happy to receive a bill for that then?
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.
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.
No, it's not a scam - and even the OP now acknowledges that, now that he understands how RPI works.
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.
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
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
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.
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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