kulutempa:

One more thing.  The writer of that FT article is obviously clueless as far as his knowledge of bond yields is concerned.  The coupon rate is the interest rate the bond initial pays on issue and it is given in the name of the bond.  So the Ghanaian 8.50% 10 year sovereign bond, would have a coupon of 8.50% if you bought it when it was first issued in September 2007, before its price began to fluctuate in the bond market.  After a bond has been successfully issued, its price begins to fluctuate in the secondary bond market in response to the market forces of supply and demand and as the prices changes every day, so does the yield which depends on the prices paid for the bonds.  This is what is known as the running yield and it is completely different from the coupon rate.   I am really surprised that  a writer for a reputable financial publication like the FT could have made such a fundamental error by comparing the running yield on the Ghanaian 10 year bond to the coupon rate on the newly issued Nigerian 10 year bond.  It is simply inexcusable even for a first year finance undergraduate.

Katsumoto:

The current yield is the market value of the bond. The current yield is what is relevant because it takes into consideration the coupon rate, current rate of similar bonds, and the present value of the principal. You cannot compare the coupon rate of a band that was issued three years ago with a bond issued today because the market as at today determines the value of all bonds. That is why the FT compared Nigeria's rate as at Friday with Ghana and Gabon's current yield as at Friday.

Bonds may sell for more or less the par value (usually $100) and the price of bonds moves in the opposite direction of interest rates. If interest rates go down, the price of the bond will go up and vice versa. The current yield is determined by the annual interest payment divided by the price of the bond. From your article, we know that the annual interest payment on a Ghanian $100 note is 8.5% and from the FT we know that the current yield is 6.3%. So we know that the current price of the bond is £134.92 (premium) which is higher than the par value ($100) of both Ghanian and Nigerian bills. Conversely, if the interest rate had increased to 10%, the Ghanian $100 note will be valued at $85 (Discount).

So on Friday, you will have paid $100 to buy a $100 Nigerian note and have the right to a coupon rate of 7%. On that same day, you will have paid $134.92 for a $100 Ghanian note and have the right to receive a coupon rate of 8.5%. Notice that the market has adjusted the price of both notes as well as the yield accruing to the investor. The key thing here is that the interest rate (coupon rate) is set by the market. So an investor will receive higher returns on the Nigerian note to reflect the 'risk'.  

Katsumoto:

I have addressed this in my last post. Your post is fine but it ignores the market value of bonds. If the current yield is lower than the coupon rate, then the value of the bond will be higher than the par value indicating a premium, if the current yield is higher, then the value of the bond will be lower than the par value indicating a discount. The FT writer made no error in his write-up.

eku_bear:

Interesting discussion.

Question for ya'll (though to some extent it has been answered already).

What are the different factors involved in then pricing loans issued by say a Nigerian corporation, in light of this bond issue?

Say a Nigerian corporation wants to borrow $100 million loan from (A) a Nigerian bank (B) a foreign bank.

I guess in both cases (A) and (B), the lender essentially assesses the creditworthiness of the corporation, and then comes up with some higher rate X% the company is going to be charged, relative to some base rate. So if the base rate is Y%, the corporation will be required to pay X+Y% for the loan, where X is a function of credit-worthiness, duration of the loan, etc.

So how concretely does this bond help Nigerian organizations seeking loans? Does the Nigerian central bank base rate change in response to this loan? Or do foreign lenders ignore whatever the Nigerian central bank sets the base rate to, and instead use this bond as the base rate (and thus price things relative to it)?

kulutempa:

Excuse me,  I don't want to appear as if I am making things up.   Here is a link with an article which explains the different types of bond yields and shows that you cannot compare a current running yield to the coupon rate on a newly issued bond.    http://monevator.com/2009/10/20/how-to-calculate-bond-yields/

I hope this helps.

kulutempa:

I stand by my explanation, which I believe is as clear as daylight, on the issue of comparing running yields and coupon rates of different bonds.  The FT writer made a monumental cock up and if I were  his editor I would fire him before the close of business today.

Katsumoto:

The article explains the different types of yields and offers some calculations. It does not state that you can not compare running (current) yield to coupon rate.

The summary of the article is below and from there you will realise that my previous calculations are right

The general rule on yields is as follows:
Bond priced at: Then:
A discount = Coupon Rate < Running Yield < Redemption yield
A premium = Coupon Rate > Running Yield > Redemption yield
Par Value = Coupon Rate = Running Yield = Redemption yield

Now use the ghanian example i gave previously
A discount ($85) = Coupon rate (8.5%) < Running Yield 10%
A premium ($134.92) = Coupon rate (8.5% > Running Yield 6.3%

I didn't calculate the redemption yield because I don't have scientific calculator with me but it is obvious that it is more than the running yield when there is a discounted bond price and less than the running yield and coupon rate when the bond price is at a premium.

I repeat, the interest rate on the day of the auction is the key because it is set by the market and depends on usual markey conditions (number of sellers and buyers, liquidity in the market, inflation, risk of bond issuer, etc)

Katsumoto:

You can stand by your explanation but it is not as clear as daylight. You provided a link that explains the different types of yields but you then stated that the article states that one can't compare coupon rates with running yields when the article did not state such. I have given a calculation which shows the correlation between coupon rates and running yields which was further backed by the article you provided. To counter my argument (which is supported by the FT article) you have to show some calculation or article which CLEARLY states that you can not compare coupon rate with running yield. I am waiting.

kulutempa:

This bond issue has nothing to do with Nigerian  central bank rate.  It is simply a benchmark for the pricing of Nigerian sovereign debt and you are quite right that foreign bond issues by Nigerian corporations like Oando and Dangote Group, will be priced relative to this benchmark using what is known in the bond market as the capital asset pricing model  (CAPM) to take account of the risk premium for lending to that particular company and the duration of the loan.   At the end of the day it is likely to lower the cost of lending for such companies as compared to borrowing from Nigerian banks,  although  they would have to contend with forex risk unless they can hedge this risk. I hope this helps.

eku_bear:

@kulutempa: It does, thanks.

To protect again forex risk. . . well, is there some sort of naira/dollar options market? If there is, then it'd be pretty easy to protect against this, yes?

Ma_J_Blige:

and as usual - the topic derails from its original intent to something else.

The topic is - Investors "shun" Nigeria's $500 million Eurobond.

The question remains-

How can something that is over subscribed be said to have been shunned? Shunned means noone wants to come near it talkless of subscribing to it- but now it is over subscribed. Cant we read english anymore or we need lessons from the so called "gurus" before we understand and grasp simple english?

For all those who spew rubbish against me- it just shows the kind of animal in you. How can you abuse and curse someone who hasnt talked to you and you think you are not going mad already?

Katsumoto:

The CAPM is not used in the bond market. The CAPM is used to calculate the required rate of return of an asset if it is included with an already diversified portfolio taking into consideration the systematic risk of that asset. The CAPM uses the risk-free rate plus the beta of systematic risk to calculate the required rate of return.  CAPM uses the rate of government bonds as the risk-free rate, therefore CAPM is not used in the bond market. The CAPM is used to decide whether to make an investment in that asset or not.

kulutempa:

The CAPM is used to calculate the required rate of return on an asset. So a bond is not an asset? If it isn't what is it? Manna from heaven?
The more you try to state your position the more you reveal that you are basically making things up. Can you provide any link, any basis for what you have just said like I have done throughout our discussion instead of trying to impress people with half knowledge.

@Ma_J_Blige. Thank you very much for getting us back on track. The issue was oversubscribed, not shunned. End of story.

babaogun:

Lagbaja and Last Samurai, you guys need to cool tempers and make the audience profit from your intelligent argument.

I personally believe you can compare oranges with apples, though I recognise you need to put each in its perspective.

Asides political risk and fiscal mismanagement affecting Nigeria, Ghana's Eurobond of 6.2% is 3 years old. Global financial situation in 2007 is different from 2011.

DeeJay20:

Too many people just dont get it,

1st Question they should ask is why the Govt is going to London Via Brussels
to Raise $500 Million dollars, for what purpose, ?

And all you ITK's chatting rubbish should close your mouths,

mrjingles:

CAPM is used to value equities not debt, whether in a portfolio context or not. A simple analysis of the CAPM formular would show why you cant use it to value debt. U need a risk free rate (rate on govt bonds) to determine  the security value. So if u want to use it to value bonds you will have to go in a round about way,(get beta security value etc) and your result may not make sense since it is theoretically unsound. Discounted cashflows, YTM, etc are better methods both in practice and theoretically so kulutempa your not exactly correct.

kulutempa:

Mr Jingles, if there is one thing I don't like it is people making bare assertions without any evidence to back it up.   The return required by debt  (bond)holders is found by applying the CAPM, as it is the basis of an analysis of the cost of debt capital.  Enquiring minds may want to read more about the subject on this link:   http://www.quickmba.com/finance/cf/  and in particular this statement in the paragraph headed Cost of Capital:

The cost of capital is the rate of return that must be realised in order to satisfy investors. The cost of  debt capital is the return demanded by investors in the firm's debt; this return is largely related to the  interest the firm pays on its debt.

Dissenting minds should provide their evidence to the contrary, or forever hold their peace.  Thank you.

babaogun:

Lagbaja and Last Samurai, you guys need to cool tempers and make the audience profit from your intelligent argument.

I personally believe you can compare oranges with apples, though I recognise you need to put each in its perspective.

Asides political risk and fiscal mismanagement affecting Nigeria, Ghana's Eurobond of 6.2% is 3 years old. Global financial situation in 2007 is different from 2011.