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1. What is nominal value?
Nominal value, also known as nominal, is the value the investor will be paid out on maturity of the bond. It is also the units that are traded, i.e either bought or sold.
Consideration is the value the investor pays on settlement dateto receive the nominalon maturity dateand the coupon interest, i.e the amount invested.
Settlement date is the date on which the investor has to pay the consideration of the bond, normally three business days after transaction date.
The transaction date is the date on which the bond is traded, i.e either bought or sold.
What is the yield to maturity? Yield to maturity, also known as YTM , is the market rate at which the bond is traded and represents the return on the bond, if the investor holds the bond to maturity. It is also the rate at which the future cash flows of the bond, i.e the nominal valueand coupons are discounted, to calculate the consideration. It is expressed as a percentage, to two or three decimal points, e.g 15,36%. Yield to maturity is semi-annual.
Coupons are the interest paid to investors every six months as per coupon rate of the bond. It is calculated by multiplying the nominal amount by the coupon rate and dividing by two.
The coupon rate is the interest rate of each bond that is used to calculate the coupon payable to an investor every six months. It is expressed as an annualised percentage, normally to two decimal places, e.g. 11,00% is the coupon rate of the E168. Eskom bond.
The clean price is the price of the bond per R100 nominal excluding accrued interest.
Accrued interest is the portion of coupon interest applicable to a bond, should the bond be transacted for a settlement date between two coupon dates. Accrued interest is either cum interest or ex interest.
Coupon date is the date on which a bond's coupons are paid. As Eskom domestic bonds are semi - annual bonds, each bond has two coupon dates per year. Note that all Eskom domestic bonds' coupon dates coincide with their maturity date, e.g. an Eskom bond maturing on 1 December 2008, will have coupons paid 1 June and 1 December of each year.
The maturity date is the date on which a bonds' nominal value and final coupon payment are made. Note that the E168 and E170 bonds have three maturity dates each. For the E168 it is 1 June 2007, 2008 and 2009, while the E170 mature on 1 August 2019, 2020 and 2021. It implies that 1/3 of the nominal value will be payable in each year. Note however that for pricing purposes, the middle maturity date is used, namely 1 June 2008 and 1 August 2020 for the E168's and E170's respectively.
Cum interest means "with interest" and is the portion of accrued interest between settlement date and the last coupon date. It is payable by an investor to the previous investor as the new investor is obviously not entitled to the full coupon, as she or he has not held it for the full period.
Ex interest, means "without interest" and is the portion of coupon interest between settlement date and next coupon date. It is payable by the previous investor to the new investor where bonds transacted are settled after book close datebut before coupon date. This is because it is assumed that the new investor will have insufficient time to registerthe bond. Thus the previous investor receives the full coupon and pays the portion of interest not due to him, i.e to the new investor.
Book close date is the date on which Eskom closes its registers to effect coupon payments. If is exactly one month before coupon date.
Bonds are registered in the name of the holder of the bond so that Eskom knows whom to pay the coupon interest to.
The all-in-price, also known as the dirty price, is the price of the bond per R100 nominal, including accrued interest. It is therefore the sum of the clean price plus accrued interest and is used to calculate the considerationdue by an investor on settlement date for purchasing the bond.
What is an Eskom domestic bond? Eskom domestic bonds are fixed income securities that have fixed semi-annual coupons, fixed maturity dates and fixed maturity values, known as nominal values. They are also known as gilts, semi-gilts and stock. Each new issue of Eskom bonds is given a unique issue number preceded by an "E", e.g E168 which is one of the more well known issues.
What is the difference between Eskom bonds and shares? Eskom bonds are fixed income securities that have fixed coupons, fixed maturity dates and fixed maturity values. An investors' return is therefore known if the bond is held till maturity. Shares on the other hand, do not have a maturity date and by implication no maturity value. Nor do shares have coupons but rather dividends. Future dividends are also unknown as it depends on the profitability of the company and its dividend policy. An investor's return on shares is therefore unknown at the offset. Note that because of the above, bonds are regarded as less risky investments than shares.
No. Eskom is a parastatal constitutued in terms of the Electricity Act of South Africa. It therefore does not have shareholders as a normal company does and may therefore not issue shares.
To finance capital projects such as building power stations and transmission lines.
What is the minimum amount that I can invest? R250 000 nominal value
Anyone who wants to. Currently from big financial managers to private individuals invest in Eskom bonds.
Where are Eskom domestic bonds traded? Eskom bonds are listed on the Bond Exchange of South Africa and trade on the South African Bond Exchange. All trading is regulated by the Financial Services Board of South Africa.
Probably because your calculator's or computer's bond pricing formula does not cater for South African convention, particularly with respect to rounding. Although the answers you get should be close, to be exact you must use the South African bond price formula. (Feel free to use the calculator we have supplied to price Eskom domestic bonds.)
Are Eskom domestic bonds guaranteed by the South African government? No. Eskom borrows through its domestic bonds or the strength of its own balance sheet. (See also Eskom's financial statements)
Does Eskom have a credit rating? Yes. Currently Eskom's domestic debt is rated by:
Can I sell my Eskom domestic bonds before they mature? Yes. Eskom will buy back your domestic bonds at the ruling market rate at any time, prior to maturity. Note that should you sell your bonds prior to maturity, your return may not equal the return guaranteed at purchase, as market rates continually fluctuate.
What causes the yield to maturity to fluctuate? Demand and supply. If there are more borrowers than investors, the ytm (yield to maturity) will rise, and conversely it will fall.
Are Eskom domestic bonds bearer bonds? No. All bonds must be registered in order to receive the coupons.
Can non-South African residents invest in Eskom domestic bonds? Yes and many do so. Note that Eskom domestic bonds are denominated in South African Rands. All interest and capital proceeds are therefore paid in rands. Also note that investors wishing to convert these rands into currencies may only do so through a foreign exchange dealer authorised by the South African Reserve Bank. Most South African Banks are authorised foreign exchange dealers. Also note that the transfer of bonds abroad are subject to South African Exchange Control regulation. Eskom strongly advises all potential foreign investors to first seek advice from your financial advisor before investing.
Are the proceeds on Eskom domestic bonds subject to tax? Yes. The amount of tax depends on the legislation applicable to you where you reside for taxation purposes. Eskom strongly advises all potential investors to first seek advice from your tax consultant or financial advisor before investing
What type of bonds does Eskom issue? Eskom basically issues two types of bonds, namely domestic and foreign bonds. Domestic bonds are all proceeded by an E, are denominated in South African rand and are listed on the South African Bond Exchange. Foreign bonds are not denominated in rands, except for the Eurorand bonds, and are issued on behalf of Eskom by certain international banks. Please contact your financial advisor with respect to Eskom's foreign bonds should you wish to invest in them. |