Isa-friendly 5.2% bond is not covered by compensation scheme and may finance retail giant's move into mortgages
With even the best-paying cash Isa currently only offering 2.9% interest, Tesco's banking arm could find plenty of takers for its new Isa-friendly "retail bond" paying 5.2%.
But cautious savers should tread carefully. These are not fixed-rate savings bonds ? they are corporate bonds that are traded on the London stock exchange and, crucially, they are not covered by the Financial Services Compensation Scheme (FSCS). If Tesco Bank went bust, you could lose some or all of your money.
However, some savers may take the view that as Tesco Bank is 100%-owned by Britain's biggest retailer, and boasts assets of almost �6bn and more than six million UK customers, they are prepared to accept that risk in exchange for a potentially much better return. This is the first such bond from Tesco Bank, though Tesco itself has issued them before.
Corporate bonds are debt issued by companies to raise money, which pay a fixed rate of interest for a set period. They are generally considered less risky than shares, but more so than putting your cash in a savings account. The main risk for the buyer of an individual corporate bond is that the issuing company might go out of business.
The new Tesco Bank bond matures in August 2018 ? in other words, the investment term is seven-and-a-half years ? and pays 5.2% gross each year. The minimum investment is �2,000, and they can be held within a stocks and shares Isa or Sipp (self-invested personal pension). You cannot buy the bonds direct from Tesco Bank ? you have to go to a stockbroker or wealth manager.
Investors do not have to keep the bonds until maturity. You get the market price whenever you want to cash them in. That might be higher or lower than the price at which you first invested.
Tesco points out that "the price of the bonds can rise and fall during the life of the investment", and the accompanying information booklet adds that "if interest rates start to rise, then the income to be paid by the bonds might become less attractive, and the price you get if you sell could fall". That might worry some potential investors, bearing in mind many experts reckon interest rates will soon be marching upwards.
Aside from any risks, not everyone will feel comfortable about helping the retail giant raise funds to extend into even more areas; it is thought the money will help finance the launch of in-store bank branches and a mortgage range in the coming months.
Formerly 50%-owned by Royal Bank of Scotland, Tesco Bank does not have its own credit rating, but Tesco PLC carries an "A3" rating from Moody's, the ratings agency.
Investors only have a few days left to decide whether this is suitable for them; for example, stockbroker Redmayne-Bentley's deadline for accepting applications is close of play on 17 February.
Source: http://www.guardian.co.uk/money/2011/feb/10/tesco-bank-launches-bond
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