Permanent Interest Bearing Shares (PIBS)

What are Permanent Interest Bearing Shares (PIBS)?

Permanent Interest Bearing Shares (PIBS) are unique investment instruments offered predominantly by building societies in the United Kingdom. These shares provide holders with a fixed rate of interest, typically paid annually or semi-annually. PIBS are distinct in that they do not have a maturity date, meaning they are considered perpetual investments. The principal amount invested in these shares is usually irredeemable except under special circumstances such as the winding-up of the issuing building society.

Features of PIBS

High Fixed Interest Rate: PIBS typically offer higher interest rates compared to standard savings accounts and other fixed-income investments.
Permanent Investment: PIBS do not have a maturity date, making them a long-term investment.
Subordinate Status: In the event of liquidation, PIBS holders are subordinate to other creditors and depositors, meaning they are at greater risk of losing their capital.
Tradable: PIBS can be bought and sold on the secondary market, allowing investors some degree of liquidity.

Examples of PIBS

Nationwide Building Society PIBS: Known for offering relatively high yields, these shares are issued by the largest building society in the UK.
Yorkshire Building Society PIBS: These shares offer fixed annual interest rates and are known for being part of a solid financial institution.
Corelian Building Society PIBS: Represent a niche market but provide competitive interest rates compared to other financial instruments.

Frequently Asked Questions (FAQs) about PIBS

What happens to my PIBS if the issuing building society goes bankrupt?

In the event of a liquidation or insolvency of the issuing building society, PIBS holders are among the last to be repaid. They rank behind all other creditors but above ordinary shareholders in the liquidation hierarchy.

Can PIBS be sold before their interest is paid out?

Yes, PIBS can be traded on the secondary market. However, the price you receive may vary depending on market conditions and the interest yield.

Are PIBS covered by the Financial Services Compensation Scheme (FSCS)?

No, PIBS are not protected by the FSCS, which means investors could lose their capital if the issuing building society becomes insolvent.

How is the interest on PIBS taxed?

The interest earned on PIBS is subject to income tax and should be declared on your tax return.

Can PIBS be converted or redeemed?

Generally, PIBS cannot be redeemed or converted into other securities, with the principal usually only returned to investors in case of the society’s wind-up or specific terms laid out in the issuance.

Building Society

A financial institution owned by its members, similar to a credit union, that offers banking and other financial services, particularly mortgage lending.

Fixed-Income Security

A type of investment that offers returns in the form of regular, or fixed, interest payments and principal repayment upon maturity.

Perpetual Bond

A bond with no maturity date that pays interest indefinitely. It is similar to PIBS but is usually issued by corporations or governments rather than building societies.

Subordinated Debt

A type of debt that ranks below other debts in the event of liquidation or bankruptcy. Subordinated debts are paid after other debts are settled.

Online References

Suggested Books for Further Studies

“Financial Instruments and Markets by Geoffrey Hirt and Stanley Block”
“Fixed Income Securities: Tools for Today’s Markets by Bruce Tuckman”
“Investments by Zvi Bodie, Alex Kane, and Alan J. Marcus”
“Understanding Financial Engineering: Become The Next Financial Wizard by Jim Gatheral”

Accounting Basics: “Permanent Interest Bearing Shares” Fundamentals Quiz

### What type of institution typically issues Permanent Interest Bearing Shares (PIBS)? - [ ] Commercial Banks - [x] Building Societies - [ ] Investment Banks - [ ] Credit Unions > **Explanation:** PIBS are typically issued by building societies in the United Kingdom. ### What is the nature of interest payments made by PIBS? - [ ] Variable interest paid monthly - [ ] Fixed interest paid only upon maturity - [x] Fixed interest paid annually or semi-annually - [ ] No interest payments > **Explanation:** PIBS usually offer a fixed rate of interest paid on an annual or semi-annual basis. ### Do PIBS have a maturity date? - [x] No, they are perpetual - [ ] Yes, typically 5 years - [ ] Yes, 10 years - [ ] Yes, 30 years > **Explanation:** PIBS are considered perpetual investments as they do not have a maturity date. ### What is the risk level of PIBS compared to other debt instruments? - [ ] Low risk, comparable to government bonds - [ ] No risk at all - [x] High risk, subordinate to other debt - [ ] Medium risk, similar to corporate bonds > **Explanation:** PIBS are considered high-risk investments because they rank below other creditors in the event of the issuer's liquidation. ### Are PIBS covered by the Financial Services Compensation Scheme (FSCS)? - [ ] Yes, fully covered - [ ] Yes, partially covered - [x] No, not covered - [ ] Only under certain conditions > **Explanation:** PIBS are not protected by the FSCS, exposing investors to a higher risk of capital loss upon issuer insolvency. ### Can PIBS be traded on the secondary market? - [x] Yes - [ ] No - [ ] Only after 5 years - [ ] Only to institutional investors > **Explanation:** PIBS can be traded on the secondary market, providing some degree of liquidity to the investors. ### What happens to PIBS in the event of the issuing building society's bankruptcy? - [ ] The principal is immediately repaid - [ ] The interest rate doubles - [x] PIBS holders rank behind other creditors - [ ] They are automatically converted to regular shares > **Explanation:** PIBS holders are subordinated to other creditors and are among the last to be repaid in the event of the issuing building society’s bankruptcy. ### How is the interest earned on PIBS treated for tax purposes? - [x] Subject to income tax - [ ] Tax-free - [ ] Subject to capital gains tax - [ ] Exempt from all taxes > **Explanation:** The interest earned on PIBS is subject to income tax and must be reported in the investor’s tax return. ### Can PIBS be redeemed or converted? - [ ] Yes, always redeemable - [ ] Yes, always convertible - [ ] Yes, but only into government bonds - [x] No, they are generally irredeemable and don't convert > **Explanation:** PIBS are generally not redeemable and cannot be converted into other securities, except under specific conditions like issuer liquidation. ### What makes PIBS particularly attractive to investors? - [ ] Their low-risk nature - [ ] Their short-term maturity - [x] Their high fixed-interest rate - [ ] Their protection by FSCS > **Explanation:** PIBS are particularly attractive to investors due to their high fixed-interest rate, despite their higher risk level.

Thank you for studying Permanent Interest Bearing Shares with us. We hope our detailed explanations and quizzes contribute to your comprehension and mastery of this specialized financial instrument!