Can I borrow your brain?

If the RPI does not move, it suggests that you get 1.2% * zero after 6 months

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

Since many of them offer around 6% fixed interest, I found it amazing that they would offer something that appears to be offering next to bu88er all.
It seems to me to be poorly described. Perhaps they trying to confuse people?

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.

You make good points. I will do some research. I'm sure the answers all lie in the PDFs attached to the link you posted (I doubt they would contain errors), I just haven't had time to go through them.

"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...

There's your key, right there:

"at maturity, investors receive 100% of their invested capital"

So, although these things can lose value when trading on the secondary market (depending where interest rates go), as long as you hold to maturity you get all your money back REGARDLESS of the market value of the bond at the time.

Like I said earlier, it's a return of capital play made clear with the 100pc redemption of invested capital at maturity guarantee.

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

Yes, I understand that. However, you must compare this retail bond to the others that have been launched. The majority offer a fixed coupon of 5-7% and a few others offer RPI + a fixed percent. This one is does not only offer a derisory low coupon, but it is described with baffling incompetence imo. 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?

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.

Oh I see. Thanks.

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.

for anyone s guide: 2.4% real yield these days are "gold"

And in other news, water is wet.

And furthermore, I haven't the faintest how indexing to RPI gives you a 2.4pc REAL yield, unless of course you foolishly believe that the RPI tracks/measures REAL inflation.

It's perhaps for your guide, if you believe that, certainly not for anyone's.

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.

I can't agree at all that "2.4 pct yearly is a competitive rate" You might argue that 2.4% is comparable with savings products. Retail bonds are not protected by the 85K savers protection. Many other recent retail bonds offered 5-7% annual fixed coupons. This retail bond appears to me to offer an absolutely worthless coupon. Since it's very hard to believe the reported inflation figures, you would be mad to invest in this retail bond. I would not be surprised to see it withdrawn and would certainly expect it to trade under water if it does get away.

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

Well done, Stow, thanks for going the extra mile on this.

I'm still waiting for an answer from Mr. Gilbert, who predictably hasn't as yet, and wont, respond.

Perhaps it all boils down to this: "you may like the credit of Morgan Stanley;". Having a TBTF counterparty may be worth points to some investors.

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/

Massive call on your part, Stow.

Hat tip from me.