Permanent Interest Bearing Share: High Yield Non-Redeemable Security

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.

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.

Risks

• 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

Importance

PIBS are essential for investors seeking stable and high-yield income. They are particularly relevant for pensioners and income-focused investors.

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.

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.