Britain's first 'council solar bond' will launch tomorrow with a project in Swindon, Wiltshire, which is offering investors a six per cent return over a 20-year term.

They say 6% but what is the real return? It's not quite as straightforward as the headline figure suggests. My calculation suggests 2% real return, allowing for 3% inflation...but I could be wrong.

rick24 - on that basis no bonds specify what their "real return" is. Who's to say 3% inflation is right? Maybe we'll have deflation and the "real return" will be over 6%.

Not suggetsing anyone should invest in this. Personally I think 6% is a bit miserly. Plenty of alternatives out there paying more than that.

Laughton The total return is £768.69 including the bonus. This is over 20 years According to http://budgeting.thenest.com/annualizing-multiyear-return-23275.html the formula to annualise this is ((1+R) ^ (1/N) - 1, where R is the multi-year return as a decimal and N is the number of years Putting in the figures: ((1+0.76869)^(1/20) gives an annualised return of 2.89%. However, the principal and interest are being paid back before the end of the term so some way has to be devised to account for the benefit that can be gained by re-investing them as they are received.

Not sure why you would want to work it out that way in any event. It seems really complicated - you're working out the total return over 20 years and then using a formula to get back to an annual figure. Also not sure that your formula is taking account of the fact that interest is paid twice yearly.

Why isn't knowing that the return is 6.5% p.a. for the first five years and then 6% p.a. for the next fifteen years enough for you?

All I was trying to point out is that your "guess" as to future inflation is just that, a guess. No-one knows what inflation will be or whether we will even have inflation at all. I don't see where your formula takes account of inflation.

Ah, OK. I should have done this before my last post but have now bothered to read the "prospectus" and see that they are paying back some of the capital each year as well as the interest. I suppose that might be attractive to some but it's not for me.

if investing to burnish green credentials, fair enough. However with oil at $35 the economic case for solar is difficult to make. Heating my house with oil costs 25% of what it cost 3 years ago. Government subsidies are being reduced for solar and it's difficult to foresee them being re-introduced. Certainly solar fuel is free but upfront capital costs are high and ongoing maintenance shouldn't be underestimated. 6% is just too thin with so many uncertainties.

John, Agree, instead of investing in solar bonds, a better opportunity for some would be installing a modern "wood burning" stove. Should help to keep the energy bills down in the far future after "the current lower investment in Oil/Gas infrastructures" causes prices to rise again in 2019. Council money getting into this area to me provides "an early warning indicator" of rough waters ahead. Beware!

Laughton: Yes, I hadn't realised it was twice yearly repayment. I don't find internal rate of return is enough for me: I would want to apply a modified form to take account of return on the amounts (principal and interest) repaid over the term.

rick24 - yes but I don't think the formula you're using does that - it doesn't take any account of the fact that you are getting back some of your capital each year. It assumes that you are working with a "regular" bond where all the capital is repaid on maturity. That's why the formula's "annualised return" is so low. The way this debenture works is that in the last year you only have £25 of your original capital left invested whereas your formula assumes that you still have £1,000.

Your formula also doesn't take any account of inflation which is what I thought you wanted.

Laughton: you are right. To that extent, it is better than a conventional bond.

To get some idea of the value to me of that feature, I have to then model the return I could expect from the capital and interest as I re-invest it. There is a calculator at http://www.moneychimp.com/calculator/compound_interest_calculator.htm, where you can input an amount each year and see how much it will be worth in x number of years at y% interest. Assuming you invest £1000, your annual repayment is £87.18 + £5 in the first 5 years if you invest early. (The £87.18 is partially the principal and partially the interest). So you could put in the annual return of 87.18 (and an extra £5 in the first 5 years) and stipulate 3% interest. This gives £2439.34. However, this is before inflation. There is an inflation calculator at http://www.thisismoney.co.uk/money/saving/article-1633422/Inflation-savings-danger-calculator.html. If I subtract the value of the original principal (£1000) and input a value of 3% for inflation, the gain in real terms appears to be £326.50. I can then apply my above formula for annualised return. Would that work? Not 100% sure. No doubt there is some genius out there who can do it properly.

In fact, there is no point in using the inflation calculator. One can just as easily build inflation into the compound interest calculation by assuming an inflation adjusted, real rate of return.

You can always find a formula to produce what you think you want to be the result.

Are you taking account of the fact that it is your £1,000 to start with. I could well be wrong but I think that the future value of £1,000 @ 3% p.a interest works out at £1,806.

If it's inflation that you're worried about, and it seems this is your overriding worry, why not look at investing in inflation linked bonds? They don't pay much but at the end of the period you will at least know that you have made a real rate of return.

You are lucky to get your oil so cheap - I am paying 39% of what it was 3-4 years ago, even so it is a bigger reduction than the paltry reduction in petrol and diesel prices

Laughton: There's no point in investing at below the rate of inflation: then you are losing money. Real return is what counts, isn't it, so one has to take a view on that, perhaps by modelling a range of scenarios. To get the actual return from £2439 (which assumes a real return of 3%), I would subtract the £1000 (being my original principal), to give £1439, then annualize it. A real return of 3% seems rather optimistic to me, however.

## Comments

No chance!

Not suggetsing anyone should invest in this. Personally I think 6% is a bit miserly. Plenty of alternatives out there paying more than that.

The total return is £768.69 including the bonus. This is over 20 years

According to http://budgeting.thenest.com/annualizing-multiyear-return-23275.html

the formula to annualise this is

((1+R) ^ (1/N) - 1, where R is the multi-year return as a decimal and N is the number of years

Putting in the figures:

((1+0.76869)^(1/20)

gives an annualised return of 2.89%.

However, the principal and interest are being paid back before the end of the term so some way has to be devised to account for the benefit that can be gained by re-investing them as they are received.

As you can see, I am only just getting to grips with IRR.

Not sure why you would want to work it out that way in any event. It seems really complicated - you're working out the total return over 20 years and then using a formula to get back to an annual figure. Also not sure that your formula is taking account of the fact that interest is paid twice yearly.

Why isn't knowing that the return is 6.5% p.a. for the first five years and then 6% p.a. for the next fifteen years enough for you?

All I was trying to point out is that your "guess" as to future inflation is just that, a guess. No-one knows what inflation will be or whether we will even have inflation at all. I don't see where your formula takes account of inflation.

Their calculator shows the IRR as being 6%.

Agree, instead of investing in solar bonds, a better opportunity for some would be installing a modern "wood burning" stove. Should help to keep the energy bills down in the far future after "the current lower investment in Oil/Gas infrastructures" causes prices to rise again in 2019.

Council money getting into this area to me provides "an early warning indicator" of rough waters ahead. Beware!

Your formula also doesn't take any account of inflation which is what I thought you wanted.

To get some idea of the value to me of that feature, I have to then model the return I could expect from the capital and interest as I re-invest it. There is a calculator at http://www.moneychimp.com/calculator/compound_interest_calculator.htm, where you can input an amount each year and see how much it will be worth in x number of years at y% interest. Assuming you invest £1000, your annual repayment is £87.18 + £5 in the first 5 years if you invest early. (The £87.18 is partially the principal and partially the interest). So you could put in the annual return of 87.18 (and an extra £5 in the first 5 years) and stipulate 3% interest. This gives £2439.34. However, this is before inflation.

There is an inflation calculator at http://www.thisismoney.co.uk/money/saving/article-1633422/Inflation-savings-danger-calculator.html. If I subtract the value of the original principal (£1000) and input a value of 3% for inflation, the gain in real terms appears to be £326.50. I can then apply my above formula for annualised return. Would that work? Not 100% sure. No doubt there is some genius out there who can do it properly.

Are you taking account of the fact that it is your £1,000 to start with. I could well be wrong but I think that the future value of £1,000 @ 3% p.a interest works out at £1,806.

If it's inflation that you're worried about, and it seems this is your overriding worry, why not look at investing in inflation linked bonds? They don't pay much but at the end of the period you will at least know that you have made a real rate of return.

You are lucky to get your oil so cheap - I am paying 39% of what it was 3-4 years ago, even so it is a bigger reduction than the paltry reduction in petrol and diesel prices