Tuesday, September 18, 2012

Zambia's $750 MIL Euro Bond Explained in Simple English

I was having a discussion with a friend yesterday about the recent Euro Bond that Zambia issued.He didnt seem to understand so I gave him an example with which he could relate to.
My friend is a bricklayer and works peacework sometimes which varies in amounts,but lets put an estimate of K10,000 a day.
Everyday he comes to the bar to have a drink of his favourite brew "shake shake".Now for example assuming one day food runs out at home and he has to spend his last money on food and does exaclty that, leaving him nothing for his favourite brew.
Assuming he still wants to drink,he agrees with the bar tender that he will borrow one packet of brew which costs K2500 and will pay it back like a Euro Bond over 10 days.
Now Follow me, this means he will pay the coupon rate of 5% everyday for 10 days.This means he will pay the bartender K125 (5% of K2500) everyday for 10 days.
At the end of the 10 days he will pay the bar tender the original K2500 for the brew and his debt will be cleared.
Now, the 10 days represents 10 yrs,the K2500 represents a quarter of K10,000 which is the same as $750 million which Government borrowed as a quarter of Zambia's annual budget of $3 billion.The coupon rate is 5.375% to be exact but everything is exactly done in the same way as the example above.
Any Questions???

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