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Sell RBS step-up bond?

Investment | Fixed Interest Helpful? 4

Asked by gmgravino, submitted 16 October 2011.

Open Quote I own a 20 year step-up bond from RBS which I bought earlier this year. My plan was to use it for retirement revenue stream. However I see par is down below 80 now which concerns me if I chose to sell before maturity. Do you see this getting worse due to European mess and would you sell to cut losses or sit tight?End Quote

Answered by Justin on 03 May 2012

I'm afraid I can't find a 20 year version of this bond, so have answered on the basis of the 7 year version. If there is a 20 year version perhaps you could post details below and I'll append my answer, thanks.

The RBS Step Up Bond is a corporate bond issued by the bank that promises to pay a fixed return over 7 years before redeeming the bond. The fixed return comprises interest of 3.3% in year, rising to 8.55% in year 7, averaging 5.3% p.a. over the period.

I'm afraid it's taken me a while to answer your question, but on the bright side the bonds are now trading at 105p (at the time of writing). The bond's price between now and maturity depends primarily on the market's perception of the likelihood tat RBS can afford to make all interest payments and redeem the bond in full at maturity. The recent rises in price suggest fears over default have subsided, but more economic turmoil could see them re-surface. Inflation and interest rates are the other key factors affecting price. If inflation and/or interest rates is expected to rise this would likely push down demand for the bonds, hence their price. And, of course, vice-versa.

Provided interest rates remain low (which looks likely for at least the next year or two) then the bond will become increasingly attractive as the interest payments rise, which is a strong argument for holding onto them. However, further eurozone trouble looks likely and this might hit price, which is an argument for cashing in.

Provided this investment is only a small part of your portfolio I'd be inclined to take the risk of staying put. I think there's a fairly good chance everything will work out fine over the remaining 6 years.

However, if it represents a big investment then perhaps consider taking some risk off the table by selling part of your holding, just in case the worst happens.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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