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Bond loans: rate of return and interest calculation

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Among the various types of financing existing on the credit market there are also the so-called bond loans , explicitly reserved for public limited companies or limited partnerships : as the word itself says, bond loans are based on bonds, have a medium and long term term, and can not be issued for amounts exceeding the paid-up capital and existing in the last financial statements approved by the company shareholders: this means that the maximum capital payable with the bond loan is proportional to the amounts paid by the shareholders by way of risk capital . At this juncture, we want to look more closely at an aspect of bond issues, namely the rate of return and the calculation of interest .

What are the bonds

What are the bonds

First of all, it is good to remember what the bonds are: these are debt securities issued by the public limited company and purchased by investors, who basically lend their money to the company, receiving in exchange a percentage of interest, called a coupon , which has a quarterly, half-yearly or yearly. Those who buy these securities are called bondholders, who take part in company risk as a function of company creditors, even if they are not involved in the management and decision-making processes within the company itself. It is possible, in some cases, to issue bonds for amounts exceeding those indicated in the approved financial statements, or when:

  • The bonds are secured by a mortgage on socially owned properties up to two thirds of their market value
  • The joint-stock company obtains an authorization from the government authority to exceed the limits on the amount envisaged on the basis of the approved budget
  • The guarantee derives from the existence of registered securities issued or certified by the State with a maturity no earlier than that of the bonds

The repayment date coincides with the expiration of one of the coupons and from this day onwards the accrual of interest ends. The repayment of the loan can be done by randomly extracting the serial numbers of the bonds of repayable bonds: in this case, on the basis of the regulation drawn up, the withdrawal date and the withdrawal date are established, and the numbers drawn are published within 10 days in the Official Gazette, so that the bondholders can learn about them.

Rate of return

Rate of return

One of the aspects that most interests the bondholder is the effective rate of return of his credit: to determine this value are various factors that actually make this type of financing different from other types of loans. These peculiar factors are the value of the nominal rate of the loan, the issue price and the redemption price: for this reason the difference between the amount paid to the bondholders at maturity of the coupon and the issue price is a value subject to withholding tax. tax provided for interest and premiums.

The bonds can also be placed by the same company for shares directly on the market with the indications of the credit institutions from which it is possible to make the payments: in this case the date of payment of the amounts of the obligations coincides with the moment in which it is enjoyed. of these. If the payment is earlier or coincides with the date of use of the bonds, the subscriber must only pay the issue amount, if instead it is later the same is required to pay an additional sum for the accrued interest accrued in the period not covered.

Calculation of interests

Calculation of interests

Finally, let’s see how the amount of interest payable is calculated , for which it is necessary to evaluate the payment dates and the dividend period: if the coupon’s maturity does not coincide with the date of January 1, a passive rate must be established to calculate the portion of interest accrued in the period of time between entitlement and 31 December, while if this maturity is between 1 January and 1 July the accrual of interest is to be considered complete, for which it is possible to calculate the obligations for the part of the net amount reserved for bondholders and the debt for withholding tax from the tax authorities. In the event that the payment is after the date on which the obligation is used, the calculation of the interest is set at the nominal value of the rate for the days of non-payment.