PIBS: Permanent Interest Bearing Shares

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.

Types

• 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.

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.

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

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.

Related Terms

• 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.

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.