The tool is used to estimate a range of the market interest rates for guarantees on loan transaction for transfer pricing or other purposes.

The tool relies on two components:

  • Estimation of a market based interest rate, based on Comparable Uncontrolled Price (CUP) method and Economic Modeling with capabilities for detailed comparability adjustments. In brief, CFO.tools uses market data from the European bond markets at a point of time to estimate applicable market interest rates by considering major factors affecting the interest rates and allowing for necessary adjustments to reflect the differences from the analyzed loan. This difference between actual and estimated interest rate is the upper bound guarantee interest rate charge as the maximum total financial effect, created by the guarantee. 
  • Estimation of the ECL as a percent on the exposure. The calculation is based on our IFRS 9 General Approach - Loans tool. The calculation estimates the ECL percent, which is the expected cost, created by the guarantee, and is considered as the lower bound interest rate charge.

The analysis is based on the following:

  • CFO.tools employs statistical analyses of bond trading data from the European markets to estimate uncontrolled market bond spreads, considering the major bond specifics, such as sector, date of issue, term, credit rating.
  • The instrument allows for various adjustments to reflect loan specifics related to country risk, currency, type of loan, size, liquidity effects. The adjustments intend to alter the specific components of the interest rates to bridge the differences (if any) between the bond market yields and the loan analyzed.
  • We use our own IFRS 9 General Approach - Loans tool module for ECL calculation, you can find more information about it also in our Tools section.

CFO.tools automatically suggests risk free rate in EUR and USD to the user (based on ECB and FED zero coupon yield estimations), credit spreads based on the required sector, terms and credit rating.

The tool estimates a market range of guarantee interest rates based on the above characteristics and data, varying the credit rating of the debtor.

Advantages

  • Automated tool that allows for very quick and efficient analysis of guarantee market interest rates
  • The market spread has been pre-calculated for various industries, credit ratings and periods
  • Monthly data updates ensure the tool stays current
  • The tool is based on a database of comparable uncontrolled price transactions (CUP method)
  • The tool allows for various corrections based on the loan and environment specifics.