Zambia Debt Restructuring for lay men

HAVING noticed the frenzy and confusion over the announced Debt Restructuring by government, I thought of making my contribution as a professional accountant to the understanding of this topic by those who may not be experts in this field.

So, to make this understanding to lay people, I will take a step by step explanation of the Debt Restructuring announcement.

This means my write up will be long and therefore will be shared in parts. In part one here I will try to define a euro bond and explain various elements of a bond.

In part two. I will explain what is being referred to as base case treatment of the Bonds and in part I will deal with the upside treatment of the bonds.

EURO BOND

So, what is a bond?

A bond is a document issued by a government borrowing money to a person lending money to the government. This document indicates how much government has borrowed, called the face value. The bond will also indicate the coupon. The coupon is the interest to be paid on the bond every year.

So if government borrows $3 billion, it will issue a $3 billion bond. If the agreed interest rate is 7.5 percent then the bond will have a coupon of 7.5 percent.

How is the bond repayment done? A bond has what is called a maturity date, this is the date at which the borrowed money should be paid as a lumpsum.

That payment is referred to as bullet payment.

So, if government issues a five-year bond of $3 billion with a coupon of 10 percent. It means government will be paying the bondholders $300 million every year for five years. After 5 years they should then pay the $3billion they borrowed to redeem the bond.

To redeem a bond is to exchange money with the original document government issued.

From this example, you will learn that government will pay interest of $1.5 billion and the principle of $3 billion making a total of $4.5 billion in five years.

So, what is a Euro bond?

It is government borrowing in a foreign currency from a foreign market.

I hope this has created a good foundation for part two where I will discuss the terms of the Debt Restructuring Agreement announced by government.