Tuesday, February 21, 2017

Is there a Legal Cap on Bond Rates?

Picture portrays bond and wonders about rate cap
Picture portrays bond and wonders about rate cap 

Actual Question:

What is the maximum interest rate and minimum interest rate for issue of debentures?


Dear Friend!
There are no laws or regulations that fix the minimum and maximum interest rates for debentures or bonds; it is the market that determines them.
The debenture is a debt contract and the interest rate is one of the contract terms. In a contract it is the mutual consent and acceptance that matters.
In reality the interest rates of debentures are governed based on following factors:
  • Is it a government debt?
  • If private debt is there a sovereign guarantee?
  • Is it a secured or unsecured?
  • What is the tenure or repayment period - short or medium or long?
  • Credit Rating assigned by independent rating agency
  • What are the prevailing market interest rates for similar instruments?
  • What is brand value of the issuer - example TATA Steel
  • There are many other factors that go into finalising the interest rate of the debenture. Finally whether the rate will be attractive to the investors and affordable to the investor are the key.

Thank you,
With Best Regards