ISA's, Bonds and Tesco Bank.

I see that Tesco's banking operations are raising funds through a bond placement with a face value yield of 5.2%.
The objective is to raise between £50 and £100m through this placement which is aimed at individuals rather than institutions.
Offer date is from 3rd Feb to the 18th Feb (unless demand is higher than anticipated), the minimum purchase is £2000 (then £100 increments), and the Maturity date of the bonds is August 2018.

I guess the appeal is the apparently decent rate of interest in comparison to savings interest. In addition the bonds are tradeable so might also appreciate slightly (or depreciate), depending upon other economic factors influencing demand and supply.

The biggest factor at the moment is inflation which will obviously deteriorate the face value of the investment if held to maturity. At maturity you would get back the £2000 invested as the bond is effectively a loan to Tesco for which you will get a 5.2% annual return.
So still much like a savings account then albeit one that pays 5.2% which is just ahead of RPI at 4.7%.

The bonds can also be held within an ISA and I note that the offer is on my brokers website.

If interest rates rise then there could well be high st offers that rise to match it but there are possibly some disadvantages here such as:
- income tax on interest from a normal account
- or only £5100 allowed in a cash ISA.

But, (and this needs checking), my understanding on the situation with bonds and gilts held within an ISA is that the interest is effectively tax free! So if you were opening a new Self Select ISA with £10,200 you could invest the whole amount in this issue (subject to availability of course), and earn 5.2% tax free! (Ah, those were the days when I could get that on a high street ISA!).
Other than that, for an investor such as myself, it is a means of diversification which should run counter cyclical to shares. For example:
- funds and investors moving out of shares would probably move into bonds for safety.
- as inflation allows companies to boost profits with price increases it pushes up interest rates and makes fixed interest investments less attractive
- inversely, low inflation (and low interest rates) can be a constraint on companies and individual savings so bonds and a higher fixed interest can be more attractive.

The first question as ever is strength of the issuer to determine if you will get your money back.
Gilts are government backed so are about as solid as we can hope for but companies are a different category. In this case, Tesco Bank is a subsidiary of Tesco so I cannot see them defaulting.
I have often considered Gilts as an investment to diversify my portfolio but never yet taken the plunge (by the way a bond or gilt needs to have 5 years left on it for it to qualify as an ISA acceptable investment). Mainly this is a case of missed opportunities but when considering an equity ISA it needs to be remembered that bonds and fixed interest securities can also qualify so again risk can be managed. 

So, potentially a tax free 5.2%, 7.5 year term, backed by Tesco's. Hmmm.

thisismoney.co.uk: Midas: Should you buy Tesco's 5.2% bonds?