Permanent Interest Bearing Shares (PIBS)

What Are Permanent Interest Bearing Shares (PIBS)?

Permanent Interest Bearing Shares (PIBS) are non-redeemable securities typically issued by building societies. Unlike traditional shares, PIBS are designed to pay a fixed interest rate to investors indefinitely. This interest rate is determined at the time of issuance and usually falls between 10% and 13.5%, offering a high yield over the long term. However, despite the attractive returns, PIBS come with significant risks due to their fixed-interest nature and the limited liquidity in the second-hand market.

Detailed Structure and Characteristics

PIBS are unique in several ways:

Non-Redeemable Nature: Once issued, PIBS cannot be bought back by the building society. Investors receive interest in perpetuity.
Interest Rate: The rate is fixed at the time of issuance, providing investors with consistent returns.
Risk Profile: In case of liquidation, PIBS holders are among the last to be paid, making these securities riskier than other debt instruments.
Market Conditions: The secondary market for PIBS is small, with approximately £800 million in circulation. This limited market can make it challenging to sell PIBS at a desired price.

Examples

Nationwide Building Society PIBS: These shares offered an interest rate of around 12% during issuance, attracting investors looking for higher yields.
Leeds Building Society PIBS: Issued at a fixed interest rate of 10.5%, they provided a perpetual, consistent return to investors.

Frequently Asked Questions

1. What is the main advantage of investing in PIBS? The main advantage is the high yield they offer, often between 10% and 13.5%, which is attractive for investors seeking fixed income.

2. What are the risks associated with PIBS? The primary risks include the lower priority in payout during liquidation and the limited liquidity in the secondary market, making it challenging to sell at an optimal price.

3. How is the interest on PIBS paid? Interest on PIBS is typically paid annually or semi-annually based on the terms set at the time of issuance.

4. Can PIBS be sold in the secondary market? Yes, though the secondary market is small and can make finding a buyer at a desired price difficult.

5. Are PIBS protected under the Financial Services Compensation Scheme (FSCS)? No, PIBS are not covered by the FSCS, making them a higher-risk investment.

**1. Building Society: A financial institution owned by its members offering banking and financial services, particularly mortgages. 2. Fixed-Income Security: An investment providing regular returns such as bonds, which could include PIBS. 3. Preference Shares: Shares that pay fixed dividends and have priority over ordinary shares in dividend payments and asset liquidation. 4. Yield: The annual income return on an investment, expressed as a percentage of the investment’s current market value.

References

Suggested Books for Further Studies

“The Bond Book” by Annette Thau
“Investment Valuation” by Aswath Damodaran
“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen

Accounting Basics: “Permanent Interest Bearing Shares (PIBS)” Fundamentals Quiz

### What type of security are PIBS considered? - [ ] Redeemable - [x] Non-redeemable - [ ] Convertible - [ ] Equity > **Explanation:** PIBS are non-redeemable securities, meaning they cannot be repurchased by the issuing building society and offer perpetual interest payments. ### What is the typical interest rate range for PIBS? - [x] 10% to 13.5% - [ ] 5% to 7% - [ ] 3% to 6% - [ ] 0.5% to 2% > **Explanation:** PIBS generally offer a high yield with interest rates typically ranging from 10% to 13.5%, making them attractive to income-seeking investors. ### In the event of liquidation, where do PIBS holders rank? - [ ] First - [ ] Second - [x] Among the last - [ ] Equal to ordinary shareholders > **Explanation:** PIBS holders are among the last to be paid during liquidation, which adds to the riskiness of these securities. ### What is a key challenge when selling PIBS in the secondary market? - [ ] High transaction fees - [x] Low liquidity - [ ] High pricing - [ ] Currency risk > **Explanation:** The secondary market for PIBS is small, making it difficult to find a buyer at a specific price, thus posing a liquidity risk. ### Which organization typically issues PIBS? - [ ] Government - [ ] Corporations - [ ] Individual Investors - [x] Building Societies > **Explanation:** Building societies are the typical issuers of PIBS, using them to raise capital while offering permanent interest-bearing options to investors. ### Are PIBS interest rates variable? - [ ] Yes, they can vary each year. - [ ] Yes, based on inflation. - [x] No, they are fixed at the time of issue. - [ ] No, they change based on market conditions. > **Explanation:** The interest rates on PIBS are fixed at the time of issuance, providing a consistent, unchanging return to holders. ### How often is interest typically paid on PIBS? - [ ] Monthly - [ ] Quarterly - [x] Annually or semi-annually - [ ] At maturity > **Explanation:** Interest on PIBS is generally paid annually or semi-annually, depending on the terms set by the issuing building society. ### Are PIBS considered a high-risk or low-risk investment? - [ ] Low-risk - [x] High-risk - [ ] No-risk - [ ] It depends on the issuing society > **Explanation:** PIBS are considered high-risk investments due to their lower priority in asset liquidation and limited secondary market liquidity. ### Can PIBS be affected by the issuing building society's financial health? - [x] Yes - [ ] No - [ ] Only in the case of fraud - [ ] Only if held for less than five years > **Explanation:** The financial health of the issuing building society directly affects PIBS since the value of interest payments and security of the investment are tied to the society’s stability. ### Are PIBS protected by the Financial Services Compensation Scheme (FSCS)? - [ ] Yes - [ ] No, unless they are held for more than 10 years - [x] No, PIBS are not covered by FSCS - [ ] Only if issued by a recognized building society > **Explanation:** PIBS are not protected under the FSCS, which adds to the investment risk as there is no compensation if the issuing building society fails.

Thank you for exploring Permanent Interest Bearing Shares (PIBS). We hope this guide and quiz have enhanced your understanding of this unique financial instrument. Happy investing!