Permanent Interest Bearing Shares (PIBS) are a type of financial instrument often issued by building societies to raise capital. Unlike ordinary shares, PIBS typically pay a fixed rate of interest and have no maturity date.
Historical Context
PIBS were first issued in the UK in the early 1990s, following a period of financial deregulation and reform. They were introduced as a means for building societies to bolster their capital reserves without relinquishing control through the issuance of traditional equity.
Types/Categories
- Fixed-Rate PIBS: Pay a predetermined fixed interest rate throughout their lifetime.
- Floating-Rate PIBS: The interest rate varies based on benchmark rates such as LIBOR.
Key Events
- 1990s: Introduction and first issuance of PIBS by several UK building societies.
- 2008 Financial Crisis: Highlighted the potential risks associated with PIBS as the financial stability of some issuing societies came under scrutiny.
Detailed Explanations
Interest Payments
PIBS are designed to pay interest annually or semi-annually. Unlike dividends on ordinary shares, these interest payments are typically at a fixed rate and do not vary with the profitability of the issuer.
Perpetual Nature
PIBS do not have a maturity date, meaning they are designed to exist indefinitely. They can be traded in the secondary market, providing liquidity to investors.
Mathematical Formulas/Models
Pricing Model
The price of a PIBS can be determined using the formula for perpetuities, given by:
Where:
- \( P \) = Price of PIBS
- \( C \) = Annual interest payment
- \( r \) = Required rate of return
Example Calculation
Suppose a PIBS pays an annual interest of £5 per share and the required rate of return is 5%. The price of the PIBS would be:
Importance and Applicability
PIBS play a significant role in:
- Capital Raising: Helping building societies raise capital without issuing new equity.
- Investor Portfolio Diversification: Providing a fixed-income security that can diversify an investment portfolio.
Examples
- A building society issuing PIBS with a fixed interest rate of 6%, providing predictable income for investors.
- The use of PIBS as a capital buffer by building societies to meet regulatory requirements.
Considerations
- Credit Risk: The risk that the issuer may not be able to make interest payments.
- Liquidity Risk: Although tradable, the market for PIBS is relatively illiquid compared to other financial instruments.
- Market Risk: Changes in interest rates can affect the market value of PIBS.
Related Terms with Definitions
- Building Society: A financial institution owned by its members, offering banking and financial services, especially mortgage lending.
- Perpetuity: A financial instrument with no maturity date, paying a continuous stream of interest.
Comparisons
- PIBS vs. Bonds: Both provide fixed interest payments, but bonds usually have a maturity date whereas PIBS do not.
- PIBS vs. Equity Shares: PIBS pay fixed interest, while equity shares may provide variable dividends based on company profitability.
Interesting Facts
- PIBS are unique to the UK financial market, with no direct equivalent in other countries.
Famous Quotes
- “The safest way to double your money is to fold it over and put it in your pocket.” – Kin Hubbard
Proverbs and Clichés
- “Don’t put all your eggs in one basket” – Emphasizing the need for portfolio diversification which can include instruments like PIBS.
Expressions, Jargon, and Slang
- Coupon Clipping: The act of collecting interest payments on bonds or similar instruments like PIBS.
FAQs
Q: Can the interest rate on PIBS change over time?
A: Fixed-rate PIBS have constant interest rates, whereas floating-rate PIBS’ interest rates can change based on market rates.
Q: Are PIBS a good investment?
A: They can be a stable income source but carry risks such as issuer creditworthiness and market liquidity.
References
- Financial Services Authority (FSA) guidelines on PIBS.
- “The Financial Times Guide to Investing” by Glen Arnold.
- Building Societies Association publications on PIBS.
Summary
Permanent Interest Bearing Shares (PIBS) are a distinctive financial instrument in the UK that provide fixed income and perpetuity. Introduced to help building societies raise capital, they serve a niche but essential role in the financial market. Though not without risks, PIBS offer potential benefits for both issuers and investors, particularly as a tool for portfolio diversification and capital stability.
