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Saturday, 28 January 2023
Kuwait’s Central Bank Issues $792 M Bonds, Tawarruq

Kuwait’s Central Bank Issues $792 M Bonds, Tawarruq

2022-10-31

 

The Central Bank of Kuwait has issued bonds worth $792 million. The bonds were sold to institutional investors, with the final tranche having been purchased by the International Finance Corporation (IFC), a member of the World Bank Group. The final tranche is the 1.25 percent tranche, which will mature in 2036. The bonds have a coupon rate of 1.25 percent and a maturity of 20 years. The bonds have been issued at an interest rate of 6.25 percent. The bonds are listed on the Kuwait Stock Exchange, with the ticker symbol KD. The bonds have an initial yield of about 6.0 percent, which is equivalent to the cost of the bond divided by the coupon rate.

What is a bond issue?

A bond issue is the issuance of bonds by a government or corporate entity. The investors will receive interest payments in the future, and in many cases, a return of their initial investment (the par value). Most government bonds are rated by credit rating agencies, which evaluate the bond’s quality based on factors such as the amount of debt the country is likely to repay, the quality of the repayments, and the economic and political risk involved.

Why issue bonds?

When a government or other entity wants to raise money, it will normally issue bonds, with investors buying the bonds, promising to repay the debt with interest. The government then creates a legal framework that allows it to spend the money raised by selling the bonds.

There are many reasons a government may want to issue bonds, including:

To finance infrastructure projects

To fund social programs

 

What is a Tawarruq?

A Tawarruq is when a government issues long-term bonds at a premium (over the market price). The Central Bank of Kuwait has issued a Tawarruq bond, which means that it has sold bonds at a higher price than the market price. A Tawarruq bond has a final coupon payment date that is later than the initial coupon date. The Central Bank of Kuwait has stated that it will make the final payment on the 1.25 percent Tawarruq bond on November 2036. The bond is listed on the Kuwait Stock Exchange, with the ticker symbol KD.

Pricing of the bonds

On October 18, 2016, the Central Bank of Kuwait announced that it would sell $792 million in bonds to finance the government’s development expenditure. The bonds had an initial yield of 6.25 percent and a final maturity of 2036. The bonds are listed on the Kuwait Stock Exchange, with the ticker symbol KD. The bonds have an initial yield of about 6.0 percent, which is equivalent to the cost of the bond divided by the coupon rate.

Why the yield is so high

The 6.25 percent yield on the Kuwaiti bond is high because it is the final and highest tranche of a 7-year issuance. The government could have sold lower-yielding bonds, but instead, it offered a higher coupon. The 6.25 percent yield is also unusually high compared to government bond yields in other countries.

Concluding remarks

Bonds are a long-term investment with a maturity of between 10 and 30 years. They are issued by national governments, public-sector entities, international Development banks and companies that provide financing for long-term projects. Investors buy bonds to receive interest payments in the future and to get a return of their initial investment plus interest. The Central Bank of Kuwait has issued a very high-profile series of bonds, which have been purchased by the International Finance Corporation (IFC), a member of the World Bank Group. The final tranche is the 1.25 percent tranche, which will mature in 2036. The bonds have a coupon rate of 1.25 percent and a maturity of 20 years. The bonds are listed on the Kuwait Stock Exchange, with the ticker symbol KD. The bonds have an initial yield of about 6.0 percent, which is equivalent to the cost of the bond divided by the coupon rate. When a government or other entity wants to raise money, it will normally issue bonds, with investors buying the bonds, promising to repay the debt with interest. The government then creates a legal framework that allows it to spend the money raised by selling the bonds. There are many reasons a government may want to issue bonds, including: To finance infrastructure projects To fund social programs To cover budget deficits

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