Bank or Corporate Bonds/Subordinated Notes/Preference shares - Discuss

Discussion in 'Markets & Economies' started by AngloSaxon, Nov 8, 2013.

  1. AngloSaxon

    AngloSaxon Active Member

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    Is anyone here an investor in bank bonds as an alternative to equity shares and cash?

    Typically $100 a share, minimum $5000 initial investment seems to be the norm. Interest rate paid quarterly on the typical 10 year life of the shares or bonds, and they can be traded or disposed of though your regular online share broker. Can be sold anytime, or at least anytime there are buyers. One drawback is the interest/dividend is usually unfranked.

    I was looking at NAB preferential shares earlier this year but did not jump in. There is now a prospectus out for an AMP Subordinated notes offer. Looking at all the banks they seem to have a range of them on the ASX. The offers are not open for very long and after the initial offer I'd need to pay for brokerage so looking at the initial offers.

    Note - I'm not interested in "If you don't hold it you don't own it" sort of comments as I'm not planning my entire portfolio to be in precious metals or real estate.

    Has anyone held these in the past, had any trouble offloading them, or were they happy with them? Was anyone a holder and unhappy with the interest?
     
  2. Byron

    Byron Guest

    Can't speak from experience but just last week I was talking to an older lady work colleague and she invested years ago in bonds with the
    IOOF and she reckons after 10 years the income is tax free.
     
  3. Old Codger

    Old Codger Active Member Silver Stacker

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    'Subordinated'!!!
     
  4. AngloSaxon

    AngloSaxon Active Member

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    That's just what AMP called them. Thought it was odd and I share your "!!!"
     
  5. AngloSaxon

    AngloSaxon Active Member

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    And Byron is she saying that as they are possibly pre-1985 capital gains tax-free? Can't see any other reason for that.
     
  6. Old Codger

    Old Codger Active Member Silver Stacker

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    AS,


    The word "subordinated" in this context usually refers to the level of security the holder is entitled to. Thus a 'First Mortgage Debenture' is first cab off the rank in a liquidation, a 'Second Mortgage Debenture is next and so on. I have never heard of a 'Third Mortgage Debenture' though. 'Trade Creditors' are lower than Corporate Bond holders, and above shareholders, EVERYBODY is above shareholders!!!

    The 'Subordinated Bond' will be 'subordinate' to something in the wash up of a liquidation You will find that in the fine print down the bottom somewhere, but the word is a warning that it is NOT at the front of the queue!

    The lower the level (of security) the higher the interest rate. Remember, "the higher the gain, the greater the risk". In any liquidation, it is often only the top level that gets any money back!

    OC
     
  7. Old Codger

    Old Codger Active Member Silver Stacker

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    PS,


    I think they changed the law a few years ago, and the ATO is TOP of the list, above all others.

    Then bank loans, , then Bond holders, trade creditors, and finally shareholders. Not certain where employee benefits rank. I think they may be classified as "Unsecured Creditors". (same as 'Trade creditors')

    OC
     
  8. Old Codger

    Old Codger Active Member Silver Stacker

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    PS2,

    Preference Shares go back along way, well over 100 - 150 years maybe more.

    Preference Shares get first dip (preference) at the profit allocated to dividend funds at a set %, and they usually attract a lower return because of that. Some are 'Convertible Preference Shares' that can be converted after 3 or 5 years or so into 'Ordinary' shares.

    When the Commercial Bank of Australia Ltd closed its doors in 1893, ALL the depositors balances were converted to 2% Preference shares. They were still in existence in 1982, when the Bank of NSW rape occurred.


    OC
     
  9. AngloSaxon

    AngloSaxon Active Member

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    Thanks OC I was hoping you'd have some input.
     
  10. Byron

    Byron Guest

    Sorry for the late reply. Haven't spoken to her lately as we don't see each other often.

    However have a look at this link. It appears investment bond income is tax free and does not need to be declared after holding the bond at least 10 years.

    http://www.ioof.com.au/investments/products/wealthbuilder/benefits
     
  11. hiho

    hiho Active Member Silver Stacker

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    Too late to get into bonds now
     
  12. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    +1.
     
  13. Old Codger

    Old Codger Active Member Silver Stacker

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    hiho,

    Any person contemplating lending money to a public company, by way of Corporate Bonds, Notes, Debentures etc, should read the latest balance sheet VERY carefully. In particular the item called NTA - Net Tangible Asset backing to the shares (the owners). That figure gives an indication of what the company will bring in a 'forced' sale. (and the vultures are gathering).

    Taken against the other Loans Outstanding by the Company gives a good indication of the 'possible' funds available in a liquidation. Bearing in mind that the shareholders are LAST on the list.


    OC
     
  14. sammysilver

    sammysilver Well-Known Member Silver Stacker

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    I wouldn't touch a bank product at this point of time. Currently the big 4 are doing very well, but I remember the GFC bailouts and think of a looming GFC2 with possible bailins that will water down the banks equity.

    I'd be looking at Woolies and Coles. We all eat.

    This is said in the light of researching for my upcoming SMSF.
     
  15. AngloSaxon

    AngloSaxon Active Member

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    That's great info! Thanks very much. Seems there is always something new to learn.
     
  16. Lovey80

    Lovey80 Well-Known Member

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    Saxon I have never bought bonds either. However, you'll remember a number of threads a while back on here about covered bonds. Covered bonds allow the bond holder to leapfrog a banks depositors in the event of a liquidation. Supported by both Labor and the Coalition the idea was to get the banks in better liquidity grounds for Basil II or what ever it was being called back in Europe at the time by getting them more funding at a lower rate of interest.

    Of course what happened is the covered bonds ended up going for what the uncovered bonds were going for previously and simply pushed the rate of uncovered bonds higher, leaving the banks in the same financial position however the depositors were now down the pecking order.

    Criminal! But check your options there.
     

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