Investors Chronicle Roadshow Trading Bonds on the London Stock Exchange

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1 Investors Chronicle Roadshow 2011 Trading Bonds on the London Stock Exchange

2 Agenda How do bonds work? Risks associated with bonds Order book for Retail Bonds London Stock Exchange Website Tools 2

3 How do bonds work?

4 Bond Basics bond tradeable security issued by borrower (bond issuer) representing formal agreement to repay the lender (the bond holder) the full amount plus interest over the lifetime of the bond issuer organisation raising capital through bond issue and which is borrowing money from bond investors principal nominal value, par value amount borrowed on which interest is paid redemption maturity date on which issuer agrees to pay back principal coupon rate annual interest rate paid, determines amount of interest paid to borrower at regular intervals 4

5 Examples MARKS & SPENCER PLC 5.625% NTS 24/03/14 Redemption = 24 March 2014 Coupon rate = 5.625% Interest paid annually e.g. holding of 10K nominal would generate single interest payment of each year TREASURY 4% TREASURY GILT 07/03/22 Redemption = 7 March 2022 Coupon rate = 4% Interest paid semi-annually e.g. holding of 5K nominal would generate two interest payments 100 each year 5

6 Bond Issuers Sovereign Governments issued by central governments, e.g. UK gilts issued through Debt Management Office (DMO) Supranational Entities issued by international bodies comprising number of sovereign member states, e.g. European Investment Bank (EIB) Local Government Authorities issued by local government bodies such as borough councils Corporate Bonds issued by private and public companies 6

7 Bond Structures Fixed-rate pay fixed rate at regular intervals over lifetime of bond until redemption when principal amount is repaid Floating-rate interest rate varies according to particular reference rate, e.g. Libor or Euribor Index-linked principal and coupon payments linked to index, e.g. inflationlinked bonds linked to consumer retail price index (RPI) Zero Coupon no interest paid, return on bond comes from discounted value at which bond is issued compared to final redemption value Convertibles offer an option to exchange the bond for a preset number of shares of the issuer 7

8 Bond Pricing bond prices expressed per 100 nominal, e.g prices quoted on clean basis, i.e. exclusive of accrued interest dirty price = clean price + accrued interest accrued interest paid to compensate seller for the period during which bond has been held but for which they will receive no coupon payment various day-count conventions, e.g. ACT/ACT, ACT/360, 30/360 etc. most important factor influencing price of bond is prevailing interest rate e.g. if interest rate on cash falls below coupon rate paid by particular bond, that bond becomes more attractive and its price will rise 8

9 Yield return generated by investment in particular bond flat yield = (annual coupon rate/current price) x 100 simple measure taking into account return from interest payments only inverse relationship between price and yield flat yield on 4% bond priced at = 3.9% if bond price rises to , flat yield falls to 3.78% gross redemption yield takes into account capital gain or loss from holding bond allows comparison of yields for bonds of different maturities 9

10 Risks associated with bonds

11 Risks Credit risk also known as Issuer risk or Default risk risk that the issuer may not be able to meet its obligations in terms of coupon payments or may not be able to pay the principal amount back to the bondholder at maturity Market risk risk that the price of the bond will fluctuate away from the price at which the investor bought it Interest rate risk specific form of market risk risk that the value of the bond may be adversely affected by the prevailing direction of interest rates 11

12 Risks Issue-specific risk relates to special features that a particular bond may have embedded within its structure, e.g. call option Currency risk relevant where an investor holds a bond which is denominated in a currency other than his or her own domestic currency value of investment may be adversely affected by fluctuations in the foreign currency exchange rate Inflation risk risk that the value of a bondholder s investment will be eroded by the effects of inflation fixed rate coupon and principal amount will end up being worth less in real terms if inflation is high during the bond s lifetime 12

13 Credit Ratings Moody s S&P Fitch INVESTMENT GRADE Highest Grade Aaa AAA AAA High quality (very strong) Aa AA AA Upper Medium Grade (strong) A A A NON INVESTMENT GRADE Lower Medium Grade Ba BB BB Low Grade (speculative) B B B Poor quality and may default Caa CCC CCC Very speculative Ca CC CC No interest being paid or bankruptcy C D C In Default C D D 13

14 Order book for Retail Bonds

15 Investor Demand increasing private investor focus on fixed income seeking alternative asset classes given current low interest rates and recent equity market volatility private investors using bond funds are keen to take more active role in managing their portfolio by selecting and trading individual bonds trading in individual debt securities allows investors to select particular bond issues and tailor their portfolio IMA Asset Management Survey 2010/11 bond funds continued to well in 2010 with 7.1bn of net sales 2009 saw highest ever inflow into bond funds, net total of 10.7bn this inflow driven almost entirely by private investors (90% of total) corporate bonds were best-selling sector 15

16 Launch of the new electronic Order book for Retail Bonds in February 2010, the London Stock Exchange launched its new electronic bond market for private investors the Order book for Retail Bonds (ORB) ORB currently has around 150 sized bonds on the platform offering a range of gilts, corporate and supranational bonds 16

17 Key features of the new market model Transparency dedicated market makers are committed to quoting two-way prices in a range of retail bonds throughout the trading day means that private investors can see continuous tradeable prices on-screen and easily monitor the value of their bond portfolio open model for all participants, offers new opportunities for price improvements prospectuses for all the bonds on ORB are available to download free from our website Regulatory supervision high degree of market monitoring and supervision EU regulated market, highest standards of disclosure and transparency 17

18 Order book new market model means private investors are able to see prices onscreen and trade in bonds in a similar way as they currently do for shares ORB is now supported by six dedicated market makers with Barclays Capital joining in October. 18

19 New bonds on ORB - raised over 1.25 billion Royal Bank of Scotland bond tradable in 100 denominations, issued on the launch day of new market Provident Financial introduced a 1 denomination bond in April 2010 Lloyds TSB launched 100 denomination retail bond in June 2010, raising 75 million RBS launched inflation-linked and floating rate bonds in November 2010, followed by inflation multiplier and step up bonds Tesco Bank listed dedicated retail bond on ORB in February 2011, raising 125 million Provident Financial brought a second bond onto ORB in March 2011, raising 75 million European Investment Bank launched a new sterling retail bond on ORB in March 2011 Lloyds TSB issued a second new bond in March 2011, raising 125 million Places for People the first non-bank issuer on ORB, launched a fixed rate bond in June 2011 raising 140 million National Grid launched the first corporate inflation-linked bond, listed Oct 2011, raised record 260 million 19

20 London Stock Exchange Website Tools

21 Bonds made easy 21

22 Exchange Website Pricing Service Bond Search Search filters Download Column headers Bond 22

23 Website pricing - detail Charts, trades and analysis Price information Trading information Last five trades Documentation 23

24 Website pricing new advanced bond search Bond issue and maturity dates Bond information Coupon and redemption information Market information 24

25 Publications 25

26 If you would like further information on the electronic Order book for Retail Bonds, please contact: Michael Johnson Tel:

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