Hello,
I have a question regarding the SPPI assessment required in IFRS 9.
Would a bond with a stated 0% interest rate qualify as an SPPI instrument? And would there be any difference in treatment, if the bond had no interest rate mentioned in the terms of agreement at all? So basically, would there be any difference between a stated 0% rate and no rate stated at all?
Thanks
IFRS 9 - SPPI assessment
- JakobLavrod
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Re: IFRS 9 - SPPI assessment
Hi!
If you have a bond with an interest rate = 0 % in the sense that it simply pays back the principal throughout the loan period, that is going to satisfy SPPI as long as there is no element that introduces additional variation. In fact, when we in Sweden had negative policy rate, you could even buy certain bonds with negative interest (and that was still fine as SPPI) .
I am less unsure what is meant if no interest is mentioned. No matter of the legal language, the bond will only satisfy SPPI if there are specific payments on specific dates (to make it possible to compute an effective interest rate). So if no interest was stated I would probably try to investigate the specific contract to learn further details.
If you have a bond with an interest rate = 0 % in the sense that it simply pays back the principal throughout the loan period, that is going to satisfy SPPI as long as there is no element that introduces additional variation. In fact, when we in Sweden had negative policy rate, you could even buy certain bonds with negative interest (and that was still fine as SPPI) .
I am less unsure what is meant if no interest is mentioned. No matter of the legal language, the bond will only satisfy SPPI if there are specific payments on specific dates (to make it possible to compute an effective interest rate). So if no interest was stated I would probably try to investigate the specific contract to learn further details.
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken
Re: IFRS 9 - SPPI assessment
Many thanks Jakob! It's an interesting example the one with the negative rates, which makes me think that 0% is still a valid number.
While on the case with the non stated rate, the instrument has a maturity which implies that the principal would be paid, but the interest rate is silent. Therefore I was thinking if a silent rate is equal to a 0% rate. But I understand they could not be the same.
Many thanks again!
While on the case with the non stated rate, the instrument has a maturity which implies that the principal would be paid, but the interest rate is silent. Therefore I was thinking if a silent rate is equal to a 0% rate. But I understand they could not be the same.
Many thanks again!
Re: IFRS 9 - SPPI assessment
What are the circumstances surrounding this bond? I.e. common control, part of a larger deal etc. I had the impression that the nominal interest rates have turned positive in almost all countries
Re: IFRS 9 - SPPI assessment
Hello Marrek,
No common control or part of a larger deal. But I think I am clear now, because it was the 0% rate which was confusing me!
All the best!
No common control or part of a larger deal. But I think I am clear now, because it was the 0% rate which was confusing me!
All the best!
- JakobLavrod
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- Posts: 190
- Joined: 15 Apr 2022, 17:11
- Location: Stockholm
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Re: IFRS 9 - SPPI assessment
One can have this problem if the bond is fixed interest rate and was bought before the rates skyrocketed but fully agree that if someone offers you an originated 0 % bond now, that would not make sense given that, for example, Swedish risk-free 1-year rate is around 3 %
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken