DETERMINING AND MANAGING THE COST OF RAISING FINANCIAL RESOURCES BY BOND ISSUERS

Abstract

Introduction. The development of methods for financing the state and enterprises has been accompanied by an increase in bond issues. The growing interest in bonds is linked to international practice regarding the successful use of this financial instrument to raise capital, as well as to a number of advantages associated with its application in addressing the issuer’s financial challenges. Additional factors driving this growth include the development of the domestic stock market and the increasing need of issuers for financial resources, coupled with the necessity to diversify their sources. The relevance of this study stems from the need to improve the methodological framework for managing bond issues, particularly regarding the design of their terms to optimise the coupon rate and issue price of the bond issue by the issuer.

Objective. The aim of this article is to examine existing methodological approaches to determining and managing the cost (price) of issuing debt securities, with a view to updating and systematising the factors that influence the coupon rate and yield, in order to determine the placement price of bonds and their nominal value as set by the issuer.

Materials and methods. The methodological basis of the study consists of existing theoretical and practical principles for determining the components of the pricing of government and corporate bonds and their nominal and current yields to maturity. In particular, the article employs the method of discounting coupon payments and face value, parametric models for estimating the term structure of interest rates (determining the zero-coupon yield curve using the Svensson and Nelson-Siegel models) and a method for determining the bond default risk premium based on the calculation of credit default swap values. To summarise the current practical approaches of issuers to managing the cost of an issue, a method of systematising and grouping the terms of current corporate issues by Ukrainian issuers has been applied. To assess the devaluation risk premium, a method of estimating the average annual rate of change in the US dollar to hryvnia exchange rate over the entire circulation period has been applied.

The empirical basis has been established using current market prices for government bonds on the Ukrainian and international stock markets, data from the National Bank of Ukraine on the circulation of domestic government bonds, and calculations of their fair value based on the zero-coupon yield curve. Particular attention is paid to data from the international rating agency Standard & Poor’s regarding current statistics on bond default rates.

Results. Based on available empirical data from open sources, the main methodological approaches to assessing the components determining the nominal value and current yield of government and corporate bonds have been tested. The practices and factors involved in setting the nominal issue value of bonds issued by Ukrainian issuers have been categorised according to their level of influence. It is also proposed to divide these into two groups: rate-determining factors (theoretical and actual yields on government bonds, yields on benchmark government bonds according to the term structure of rates, the level of the issuer’s individual risks, market yields on similar issues of corporate bonds, the presence and quality of collateral); rate-adjusting factors (issue currency, coupon payment frequency, actions of financial intermediaries involved in the issue, type of coupon rate, etc.). It has been demonstrated that existing methods for determining the components of the coupon rate and yield to maturity can serve as an effective management tool for issuers in justifying their values, provided that a systematic analysis is applied, taking into account the current regulatory framework governing the issuance and circulation of government and corporate bonds, the economic situation and the level of war risks, the weakness of the national stock market, and common business practice.

Outlook. Further enhancing the investment appeal and success of the initial public offering and secondary trading of bonds issued by Ukrainian issuers requires improving the mechanisms governing the operation of organised stock markets, attracting a greater number of issuers and investors to the issuance and trading of this financial instrument, and supporting economic stability in the country, and the development of financial literacy among the general public and entrepreneurs.