Permanent Interest Bearing Shares (PIBS) are a specialized financial instrument primarily issued by building societies. This article delves into their historical context, types, key events, characteristics, risks, applicability, and market considerations.
Historical Context
PIBS were introduced in the UK in the early 1990s as a mechanism for building societies to raise capital. They have served as a stable source of perpetual income for investors due to their fixed interest rates, often between 10% and 13.5%.
Characteristics of PIBS
- Non-Redeemable: Once issued, these shares cannot be bought back by the issuing building society.
- Fixed Interest Rate: The interest rate is determined at issuance and remains constant.
- Perpetuity: PIBS offer a potentially endless stream of income until the issuing society liquidates.
- High Yield: The interest rates provided are significantly higher than those of conventional savings accounts or government bonds.
Key Events
- 1990s: Introduction of PIBS as an attractive investment option for income-seeking investors.
- 2008 Financial Crisis: Affected the perception of PIBS due to liquidity and credit risks.
- Building Society Act 1997: Allowed building societies to convert to banks, impacting the market dynamics for PIBS.
Risks and Considerations
- Credit Risk: In the event of liquidation, PIBS holders are among the last to be paid.
- Liquidity Risk: The secondary market for PIBS is limited, making it challenging to find buyers.
- Interest Rate Risk: Fixed interest rates mean the real yield can be eroded by inflation or rising market interest rates.
Market Considerations
The market size for PIBS is relatively small, estimated at around £800 million. This can lead to volatility and difficulties in price determination.
Mathematical Model for Yield Calculation
The yield on a PIBS can be calculated using the formula for fixed-income securities:
- \( Y \) = Yield (%)
- \( C \) = Annual coupon payment
- \( P \) = Current price of the PIBS
Mermaid Diagram of PIBS Market Structure
graph TD;
A[Building Society] -->|Issues PIBS| B[Investors]
B -->|Secondary Market| C[PIBS Market]
C -->|Trades PIBS| B
Importance and Applicability
PIBS are essential for investors seeking stable and high-yield income. They are particularly relevant for pensioners and income-focused investors.
Examples
- Nationwide Building Society: One of the prominent issuers of PIBS.
- Coventry Building Society: Known for offering competitive fixed interest rates on its PIBS.
Considerations
- Investment Horizon: Ideal for long-term investors due to their perpetual nature.
- Risk Appetite: Suitable for those willing to accept credit and liquidity risks in exchange for higher returns.
Related Terms
- Building Society: A financial institution owned by its members that offers banking and financial services.
- Fixed-Income Security: An investment that provides regular income payments at a fixed interest rate.
- Perpetuity: An annuity that has no end.
Comparisons
- Government Bonds vs PIBS: While both offer fixed interest, government bonds are backed by government credit, making them less risky but with lower yields compared to PIBS.
- Corporate Bonds vs PIBS: Corporate bonds may offer variable yields and different risk profiles, but typically lack the non-redeemable nature of PIBS.
Interesting Facts
- PIBS were a popular investment during periods of high inflation due to their attractive fixed rates.
- The limited secondary market makes them less prone to speculative trading.
Famous Quotes
- “In the business world, the rearview mirror is always clearer than the windshield.” – Warren Buffett
Proverbs and Clichés
- “Don’t put all your eggs in one basket.”
Expressions
- “High risk, high reward.”
Jargon and Slang
- Perpetual Bond: Another term often used interchangeably with PIBS.
- Coupon Clipping: Refers to the collection of interest payments from fixed-income securities.
FAQs
Q: What happens if the issuing building society goes bankrupt? A: PIBS holders are last in line to be paid out, making this a high-risk investment.
Q: Can PIBS be sold on a secondary market? A: Yes, but the market is small, which can make finding a buyer challenging.
Q: How are PIBS different from other fixed-income securities? A: PIBS are non-redeemable and provide a perpetual income stream at a fixed rate.
References
- Building Societies Association. (n.d.). Permanent Interest Bearing Shares.
- Financial Conduct Authority (FCA). (2022). Investment Risk and Return.
Summary
Permanent Interest Bearing Shares (PIBS) represent a unique investment opportunity, offering high-yield, perpetual income at the cost of increased risk and limited market liquidity. Understanding their characteristics, market dynamics, and associated risks is crucial for investors looking to leverage this financial instrument for stable returns.
This comprehensive encyclopedia article aims to provide thorough insights into Permanent Interest Bearing Shares (PIBS), from their historical significance to practical investment considerations.
