Interest Rate on Bonds explained by Bankers
With harsh comments about the "real" interest rates on the sovereign bonds recently placed on the world market, two bankers explain how the figures were reached.
Diario Libre said that two executives of Barclays and J.P. Morgan who negotiated the US$500 million in sovereign bonds that were recently issued by the Dominican Republic on the international market, stressed the receptivity that they received among the foreign investors. Gustavo Ferrero, an executive at Barclays and Roberto D'Avora from J.P. Morgan, said that the reason for the receptivity is that the Dominican Republic offers very interesting credit conditions for investors. They said that the bonds were placed on the market at 6.75% a year, the lowest interest rate for the country on the international market since the first bonds were issued in September 2001.
They said that the bond existed and had a 7.5% coupon, but the placement that the Dominican Republic carried out among investors was successful, with a premium value of more than 100% of face value. "The bonds were sold at US$103.545, and when the yield of these is calculated, with the 7.5% coupon, it implies an implicit rate of 6.95%," they said. They added that the premium was US$17.7 million above the nominal US$500 million, which means a percentage of 3.545%. Moreover they obtained US$8.5 million in accrued interest.
Meanwhile, a Central Bank statement cleared up the fact that the excess demand for the bonds "caused the placement cost to increase over par value, or price of emission, reducing the net financial costs for the country to 6.95%, below the coupon rate of 7.5%." According to the Central Bank, this means that the investors voluntarily paid a premium or additional sum of US$17,500,000, which the country received at the moment of placement, which made it possible that the net effective interest rate would be 6.95% and not 7.5%.