Royal Bank of Scotland Exchange Traded Bonds basically involve you lending the bank money for 12 years. However, unlike conventional corporate bonds, the rate of interest RBS pays is variable rather than fixed, being linked to either 3 month LIBOR (usually fairly similar to the Bank of England Base Rate) or inflation (measured by the Retail Price Index).
Income, paid quarterly, is a minimum 3.9% gross a year but will rise if the prevailing interest rates or level of inflation are higher, depending on which option you choose. The bonds can be bought and sold via the London Stock Exchange using a stockbroker. RBS expects the difference between the buying and selling price (i.e. the 'spread') to be around 1%, although it could obviously be higher or lower depending on the numbers of buyers and sellers.
Now it's important to point out these bonds are very different to a savings account. The value of your investment will vary between now and maturity depending on demand for the bonds, so there's a chance you could lose money if you sell meanwhile. And there's no guarantee you'll receive your interest or repayment at maturity if RBS can't afford to pay you, in which case you won't be covered by the Financial Services compensation Scheme. So beware these risks.
What will affect the price of these bonds until maturity?
Well almost certainly the biggest factor will be RBS's financial position. The more financially secure RBS appears to be the more you'd expect to pay for the bonds, as there's a greater likelihood of receiving all the interest payments and capital at maturity. And if RBS's fortunes decline then the price of these bonds probably will too as the risks increase. The bank, which is currently 70% owned by the Government, made a small profit in the first half of this year but its financial position is still precarious, so I don't think RBS corporate bonds can be described as a low risk investment.
The other main influences will be interest rates and inflation, depending on which type of bond you own. The bonds linked to interest rates will likely fall in price if inflation rises (and vice-versa) as future income and capital at maturity will buy increasingly less versus today. And you'd expect higher interest rates to reduce the price of the inflation-linked bonds as a savings account might start to look relatively more attractive.
Are these bonds good value versus competitors?
It's hard to make a direct comparison as most comparable bonds pay a fixed rate of interest, but a basic comparison should help see how things stack up. Bonds issued by HSBC and Halifax with similar periods until maturity have, at the time of writing, gross redemption yields of 5.9% and 7.8% respectively. Halifax bonds are probably more comparable to RBS as both banks have struggled and the risks more similar.
3.9% interest looks stingy versus 7.8%, even with the potential for rising interest rates. At the time of writing 3 month LIBOR is about 0.74%, so interest rates will have to rise significantly to generate a comparable yield from the interest rate linked version of these bonds - I don't see this happening for some while, if at all. The inflation-linked bonds could offer more potential if inflation continues to rise, but there are arguments that it could fall or even become negative if our economy tips back into recession.
All in all I think these bonds are more a cheap form of borrowing for RBS than a compelling proposition for investors. While the scope for interest paid to rise with interest rates or inflation is appealing, the rates offered are just too low to fairly compensate for the risks involved, especially when compared to competitors.