LSE launches retail bond market

1st Feb 2010 17:18

Some 33 years after the Jim Callaghan-led Labour government became an unlikely midwife to the concept of a 'share owning democracy' with its privatisation of a chunk of the government's stake in BP, the London Stock Exchange (LSE) is hoping to convert a proportion of the British public to the appeal of owning bonds.February 1 marked the first day of trading for the London Stock Exchange's new electronic order book for retail bonds. Initially, 49 government bonds - known as 'gilts' - and ten corporate bonds (bonds issued by companies) will be traded on the LSE's new market.Heavily indebted part-nationalised bank Royal Bank of Scotland chose to mark the first day of the new platform with the issue of a ten year bond priced at £100 and offering a coupon (interest rate) of 5.1% per year over a ten year period. Traders may also buy or sell bonds issued by other well known UK companies such as BT, GlaxoSmithkline, National Grid and Tesco, as well as US firms such as investment bank Morgan Stanley and GE Capital, the financing arm spun off from holding company General Electric.The LSE said investors will be able to see live prices on screen and trade in increments as low as £1 for gilts and £1,000 for corporate bonds, in a process similar to share dealing. The idea for a bond market targeting the man and woman in the street has been imported from Borsa Italiana, the LSE subsidiary, which operates the MOT market, Europe's largest retail bond market. The MOT platform processed €230bn of trades in 2009. Lord Myners, Financial Services Secretary to the Treasury, welcomed the launch of the new bond market, saying it will 'offer companies a new route to access capital that is vital for growth, benefiting the wider British economy.'His Conservative party counterpart, Philip Hammond, hailed the launch as an important day for savers. 'For the first time ordinary individuals in this country have a dedicated platform which will allow them to invest modest amounts of money in individual company bonds,' Hammond said.Bonds jargon busterGilt - a gilt-edged security is a bond issued by the British governmentCorporate bond - a bond issued by a companyBond - a form of debt. The issuer issues a bond at a specific price and agrees to buy back the bond at a specific price at a designated date in the future; in the meantime, the company will agree to pay a fixed amount each year to the owner of the bondFixed income - bonds are often called 'fixed income' securities because the amount they pay out each year is fixed as a percentage of the par price (see below) of the bondPar - the price at which the bond will be bought back by the issuer at the end of its lifespan. Bonds are usually, but not always, issued at the par priceCoupon - the amount, expressed as a percentage of the par price, which is paid out each year to the bond holder each year. It is just like an interest payment on a loanDuration - the lifespan of the bond, indicating how long it will be after a bond is issued before it is bought back by the issuerYield - how much, in percentage terms, an investor can expect to earn from buying the bond at the current price. This is not the same as the coupon. A bond with a par price of £100 that has a coupon of 5% will pay £5 in interest each year; if you, as a buyer, purchase the bond in the market at £50 then the £5 interest each year will give you a yield on your investment of 10% (i.e. £5/£50 * 100)Background to the launch