Monday 29 June 2015

NDBIB structures first listed zero coupon debenture

NDB Investment Bank Limited (NDBIB), the premier investment bank in Sri Lanka, yet again demonstrated their commitment to introduce novel products to the market by structuring the first ever zero coupon debenture to be listed on the Colombo Stock Exchange.

This innovation was successfully introduced to the market through the recently concluded Rated Unsecured Subordinated Redeemable Debenture issue of National Development Bank PLC (NDB) amounting to LKR 10 Billion.

Commenting on the successful issuance of this pioneering instrument, Chief Executive Officer of NDBIB, Darshan Perera said, “We, at NDBIB, are committed to introduce new products to the capital market and the Listed Zero Coupon Debenture is yet another innovative security to the Colombo Bourse.

The Instrument was well received by the market and the entire quantum was quickly snapped up by provident funds, insurance funds and high net worth individuals”.

Zero Coupon instrumentsdo not carry periodic interest paymentsand are issued at a discount to theFace Value.

The expected return to the investor is generated through capital gains.In thecase of NDB Debentures, the Zero Coupon instruments with Face Value of LKR 100/- were issued at a discount price of LKR 63.8136 each providing the investors an Annual Effective Rate of 9.40% for a tenure of 5 Years.

Commenting on the issuance of this Zero Coupon instrument, Chief Operating Officer of NDBIB, Kaushini Laksumanage said, “Zero Coupon Instruments offer benefits to both investors and issuers alike. In a plain vanilla Debt Instrument, investorsneed to reinvest the periodic interest receiptsat the same interest rate offered initially in order to realize theoriginal Annual Effective Rate of the Instrument.”

“As such, if the prevailing interest rates are lower than the rate offered initially, the Investors face the risk of earning a lower Annual Effective Rate on the investment.

This risk is referred to as the “Reinvestment Risk”.

Commenting further on the Zero Coupon instrument, Kaushini Laksumanage said, “from the issuers’ point of view, Zero Coupon Instruments will have no cash flow obligations until redemption,thereby enabling better cash flow management.Furthermore, Zero Coupon Instruments enable issuers to minimize duration mismatches in their asset and liability portfolios.”

“This can also be useful for investors such as provident and insurance funds and banks in order to achieve better management of assets and liabilities”.
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