A medium-term note (MTN) is a type of debt that is issued by a borrower and paid back by a lender. Debt is a way of borrowing money from someone else and promising to pay it back later, usually with some interest. Interest is the extra money that the borrower pays to the lender for using their money.
A medium-term note has a maturity date, which is the date when the borrower has to pay back the lender. The maturity date of an MTN is usually between five to ten years, but it can be shorter or longer depending on the agreement between the borrower and the lender. The maturity date is important because it affects the interest rate that the borrower has to pay. Generally, the longer the maturity date, the higher the interest rate, because the lender is taking more risk by lending money for a longer time.
A medium-term note can have a fixed or a floating interest rate. A fixed interest rate means that the borrower pays the same amount of interest every year until the maturity date. A floating interest rate means that the borrower pays a different amount of interest every year depending on the market conditions. A floating interest rate can be higher or lower than a fixed interest rate, depending on how the market changes.
A medium-term note can be issued by different types of borrowers, such as governments, corporations, or non-profit organizations. They can use the money that they borrow for various purposes, such as funding projects, expanding operations, or refinancing debt. A medium-term note can be sold to different types of lenders, such as banks, insurance companies, or individual investors. They can buy the MTN from the borrower directly or through a dealer, who is a middleman who helps the borrower and the lender find each other and agree on the terms of the debt.
A medium-term note is a flexible and convenient way of borrowing and lending money. It allows the borrower and the lender to customize the terms of the debt according to their needs and preferences. It also provides a steady source of income for the lender and a steady source of funding for the borrower. However, a medium-term note also involves some risks, such as the possibility of default, which is when the borrower fails to pay back the lender, or the possibility of interest rate changes, which can affect the value of the debt. Therefore, both the borrower and the lender should carefully evaluate the benefits and costs of a medium-term note before issuing or buying one.
Basic Theory:
MTNs are debt securities with fixed interest rates that mature in the medium term, making them an attractive option for both issuers and investors. The interest rate on an MTN is determined at the time of issuance and remains constant throughout its life. The principal amount is repaid to the investor at maturity. The key components of MTNs include the face value, coupon rate, and maturity date.
Procedures for Calculating MTN Costs in Excel:
-
Face Value Calculation:
The face value is the principal amount of the MTN. It is calculated using the formula:
Face Value = Issue Size / (1 + (Coupon Rate * Tenure)) -
Coupon Payment Calculation:
The annual interest payment, or coupon payment, is calculated using the formula:
Coupon Payment = Face Value * Coupon Rate -
Total Cost Calculation:
The total cost of the MTN is the sum of all coupon payments over the tenure:
Total Cost = Coupon Payment * Tenure
Scenario with Real Numbers:
Let’s consider a scenario where a corporation issues an MTN with the following parameters:
- Issue Size: $1,000,000
- Coupon Rate: 5%
- Tenure: 5 years
1. Face Value Calculation:
Face Value = $1,000,000 / (1 + (0.05 * 5)) = $1,000,000 / 1.25 = $800,000
2. Coupon Payment Calculation:
Coupon Payment = $800,000 * 0.05 = $40,000
3. Total Cost Calculation:
Total Cost = $40,000 * 5 = $200,000
Result:
In this scenario, the face value of the MTN is $800,000, and the total cost over the 5-year tenure is $200,000.
Other Approaches:
- Use the
PVfunction in Excel to calculate the present value of future cash flows, including coupon
payments. - Utilize the
IRRfunction to calculate the internal rate of return, helping assess the
profitability of the MTN.
