Abstract. The objective of this article is theoretical and methodological justifying of determining algorithm of the cost of debt capital for enterprises functioning in emerging markets (EM). The methods of research: analysis and synthesis, system analysis, comparative analysis, empirical and statistical methods, factor analysis.

 Results.  In this article key determinants of interest rates on debt capital for enterprises and their impact on the procedure of discount rate calculation are determined. The issue of the cost of debt calculation of enterprises in condition of absence of complete information concerning systematic and non-systematic crediting risks is studied. Differences between interest rate on the loan fixed in credit agreement and expected by creditors the cost of debt are identified. It is determined that the key factor impacting the deviation level of market value of debt capital from the nominal, and respectively, deviation of the cost of debt from the cost of capital is probability of default (PD). At the minimum values of PD, the contract interest rate corresponds to the rate of cost of debt and it is advisable to use it for discount rate calculation. Critical analysis of alternative methodological approaches of the cost of debt calculation is made. Ways of integrating of market information concerning credit default swaps into the process of expected cost of debt calculation are justified. Factors of shadowing of rates of the cost of debt and ways of reducing of shadow transactions’ level in the credit market are identified.

Conclusions. At high PD values, expected by market premium for default risk may exceed the contract interest rate, which necessitates constant monitoring of credit risks and appropriate adaptation of interest rates. In the paper the algorithm of such adaptation are proposed. It is shown that in the case of non-use of interest rates adjustment taking into account changes in PD, CDS and LGD, premium for creditors’ systematic risk can differ significantly from market values of similar enterprises (peer-group), and estimated value of the cost of debt can acquire negative values. Contract (promised) interest rate should be set in such way that the premium for systematic risk of providing debt capital will be at the level of similar companies and does not change significantly as a result of probability of default changes. If in practice the opposite situation occurs, it is the evidence of contract interest rate shadowing, absence of effective system of assessment  and management of credit risks. For solving the problem of interest rate transparency and filling of information gaps concerning PD borrowers in EM countries, should intensify CDS market.

Keywords: debt capital, default probability, non-performing loans, credit default swap, credit spread, debt capital premium, shadow economy.

JEL Classification E47

Formulas: 16; fig.: 0; tabl.: 3; bibl.: 15.




How to Cite

Tereshchenko, O. ., Stetsko, M. ., Tkachenko, N. ., & Babiak, N. . (2021). DETERMINANTS OF INTEREST RATES ON CORPORATE DEBT. Financial and Credit Activity: Problems of Theory and Practice, 4(39), 264–275.



The models and process technology of the financial information