Can I borrow your brain?

I don't understand what your question is, or even worse why you find it funny. What do you mean "what do you make of this coupon"? As you articulated, it's pretty much self explanatory, and actually not even that unusual in today's bond markets. And don't forget that although the coupon is calculated semi-annually, these instruments are of a 10 year duration and trade freely on the market. So, there's a lot more the consider other than "if RPI doesn't move, then you get zero interest after six months".

To put simply though, it's mostly a return of capital play, not a return on capital, and given what has just taken place in Cyprus (and evidently in the works here, the US and Canada, "bail-ins" in case of an "unlikely event" that there is a need to recapitalize a systemically important financial institution - I can point you in the right direction if you think that Cyprus was "one off" and "unique" and if you believe that it could never happen here) instruments like these will get the attention of small investors with unsecured deposits in a bank looking for a place to hide. Buying treasuries, gilts or other government bonds which would be more "secure" than this type of instrument is next to impossible for the small investor, so you run with what's out there.

The motivation would be pretty much along the same line as large investors lending Germany money at a loss.

Why are investors paying to lend German government money?
http://www.guardian.co.uk/business/economics-blog/2012/may/23/why-investors-german-schatz-bunds

I wouldn't be surprised if they hadn't c0cked the whole description up. Surely that's 1.2 times and not 1.2% times? It's not obvious what it's supposed to mean to me.

"The 10-year Bond offers investors semi-annual coupon payments of 1.2% (2.4% p.a.), adjusted by the movement of the UK retail price Index. This  adjustment is calculated by taking the level of UK RPI for the relevant coupon date, and by dividing this with the level of UK RPI reported for August 2012. Please note that as coupons are dependent on the level of the UK RPI, the level of the semi-annual coupon can rise or fall. at maturity, investors receive 100% of their invested capital. Please note that the invested capital is not adjusted for inflation when it is repaid at maturity."

Unbelievable. 2.4% per year with a possibility that the annual dividend can fall if RPI goes down
Who on earth is going to invest in this?

initial UK RPI level: the level of the UK rpI reported for August 2012 (243.00)

See also the Positive and negative Scenario tables on the 3rd page Doesn't look that positive to me
http://www.londonstockexchange.com/prices-and-markets/retail-bonds/newrecent/msrp-2023infobklt.pdf

The biggest risk of course is, will the counterparty (in this case MS) be there at maturity?

The  Positive Scenario table shown in the document indicates LOWER coupons than the 2.4% start out rate. Now surely that cannot possibly be correct?

What they are showing in the illustration is the a semi-annual coupon calculation which is typical of these bonds (1.2pc/2.4pc p.a.)




At any rate, this is an interesting find and you raise some interesting questions, so I fired an email to Mr Gilbert asking him to point out what I may be missing when reviewing this product. I will post when/if I receive a response. Unfortunately these guys are notorious for not responding to emails.

hi guys, it s all much simpler.
the rpi index is a number, base 100 few years ago, now around 240ish
you take your 1.2pct and multiply by some number that it CANNOT be zero, normally you would get something like 240/236 or 244/241.6 so it always have a positive coupon of around 2.4% adjusted to inflation. at 2.4 pct yearly, it s a competitive rate and there s nothing sinister about return of capital, cyprus, or any other bullstuff like that.
whilst there: lets not confuse duration with maurity, especially on a linker. it gives earache to hear some things.

And in other news, water is wet.

Of course it all depends on what your definition of REAL is.

At any rate, your "2.4pc yield is gold" now days touched on one very important point. If you want any kind of yield now days, you have to accept more risk (have you been paying attention to the junk bond market lately? - people never learn). It will all blow up in our face one day, but you may as well make some hay while the sun is shinning.

Morgan Stanley retail bond review

Conclusion: Just what is the point? I accept the name is good, I accept they may be able to borrow in the wider markets at this sort of level and I accept seeking out protection from inflation makes sense, but I cannot see the point in buying this bond as the actual return you will receive is so very low. In their information leaflet the arrangers are very clear that the principal of the issue is not linked to RPI (they have this point in bold). Nevertheless I feel the terms of this issue have been cleverly organised to give the impression you have a greater protection against inflation than is actually the case and to that extent it may be misleading. By all means disagree with my interpretation; you may like the credit of Morgan Stanley; you may think a bit of protection against inflation matched with a higher coupon than the traditional linkers have is good enough for you. However, make a conscious decision and do not sleep walk into buying this bond. Do not think “I might as well buy a bit of each retail bond” and stand in a queue, with your head in the clouds and a bowl in your hand ready to receive your portion. If you do, when you look down, like Oliver, you may find a bowl of workhouse gruel that only Mr. Bumble could serve up. I shall not be buying this issue or recommending it to my clients.

http://fixedincomeinvestor.selftrade.co.uk/x/mem_selftrade/analysis.html?type=Bond%20of%20the%20Week&cat=Analysis%20%26%20Comment

The Issuer has decided not to proceed with the issue of the Notes and accordingly the Offer Period relating to the Notes, which commenced on 3 April 2013 and was originally scheduled to close on 17 April 2013, will close early at 2pm (London time) on 15 April 2013.

http://www.investegate.co.uk/morgan-stanley-b-v---55pr-/rns/early-closure-of-offer-period/201304121617362827C/