Factors affecting the bond interest rate of South Korean public institutions

Abstract

K-water, has seen a 10-fold increase in its debt equity ratio over the past decade. According to the theory of financial management, an increase in a company's debt equity ratio also increases the risk of bankruptcy, thus increasing the cost of financing the company. Thus these following questions were studied in this study. Does the bond interest rate rise when the debt ratio of public corporations increases? What are the other factors that affect the bond's interest rate? In the first analysis, K-water & Korea Express Highway’s the bond valuation yield was analyzed. According to the analysis of the bond valuation yield of the two companies, these two companies are still publicly notified of the same bond valuation yield as in the past, even though K-water's debt ratio is 100%p higher than that of the Korea Expressway Corp. Therefore, it is hard to say that there is a correlation between the debt equity ratio and the bond interest rate. In the second analysis, the K-water and LH cases analyzed the correlation of factors affecting bond interest rates among various independent variables, such as market conditions and issuance amount, including the benchmark interest rate, in addition to the financial ratio. The analysis showed that the independent variables that affect the two companies were net issuance amount and maturity. According to the above two analyses, the bond issue rate of public corporations is not related to the increase in financial risks such as debt-to-equity ratio. This means that even if the debt ratio of public corporations increases and the financial risk increases, the investor does not believe that the risk of bankruptcy of public corporations increases, in other words, the investor is seen as putting more importance on the government's supportability when investing in bonds of public.