Zambia's $750 mil EuroBond :Talk time example

A need has arisen to explain the recent Eurobond issue by the Zambian Government using an example that everyone can relate to and understand, talk time.

Now Airtel, a mobile service provider in Zambia, has a promotion called Siliza. This allows you to borrow air time when you have nothing in your account. We shall use an adapted version of this promotion to explain the Euro Bond.

Now before we begin, we must explain two key terms that are vital to understanding a Eurobond. The first is the Principal; this is the amount that is borrowed to be paid back at the maturity of the Bond which is after the period of the bond has elapsed in this case 10 years.

The next term is called the Coupon Rate; this is a rate of interest Annually. The Coupon rate is calculated as a percentage of the principal in this case the coupon rate is 5.375%.

We can now get to the example that uses talk time to explain the Eurobond. Let us take for example a guy by the name of Chuck Bass who puts K 50, 000 talk time in his phone every day. On one fateful day, Chuck Bass runs out of talk time making a call to his girlfriend Blair, and since he needs to tell her that he loves her he decides to borrow K 7,500 from Airtel like a Eurobond to be paid after 10 days. This is what will happen; since Chuck Bass puts K 50,000 in his phone account every day, and the coupon rate is paid bi-annually, Airtel will take 5% of the amount he borrowed after every day 2.5% after every 12 hours which is half a day(bi annual is half a year).

Now 5% of K 7, 500 is K375, which means Airtel will deduct K187.5 (2.5%) after every 12 hours and  per day Airtel will deduct K375 .This will happen for the next 10 days, after which Chuck Bass will pay the principal (K7,500)through his phone account and the balance would have been cleared.

Now to relate this to the Euro Bond, the principal which is the money that the Zambian Government borrowed is $750 million and the annual budget for Zambia as from last year’s figures is $5 billion.

The coupon rate paid is 5.375% but we round it off to 5%.Now what follows here is important. The money that Chuck Bass borrowed which is K 7, 500 represents the money that the Zambian Government has borrowed which is $750 million. The money that Chuck Bass puts in his phone account every day which is K 50, 000 represents the annual budget of Zambia which is approximately $5 billion.

The 10 days that it takes Chuck Bass to pay back the borrowed Airtime represent the 10 years it will take the Zambian government to pay back the principal and the coupon in Full at maturity.

The same way you would calculate how much Chuck Bass pays Airtel is the same way you would calculate how much the Zambian Government will pay Euro Bond holders.

Note that Chuck Bass is a fictional character; any resemblances in person or by chance are completely unintentional.

A note has to be included on the time value of money as the reason why bonds exist.Inflation reduces the value of money gradually so hence bonds are the best way to prevent loss of value through the time value of money.
It must also be noted that capital projects  go hand in hand with long term bonds like building a hydro power station which have high return afterwards and can pay of its dues effectively.

Thank you goes to Mr Masengo for correcting the coupon payments part of this example.

Kampamba Shula BSc Economics