Treasury bonds are a safe, medium- to long-term investment that pays interest every six months for the duration of the bond’s maturity. In Kenya, the majority of Treasury bonds are fixed rate, which means that the interest rate set at auction is guaranteed for the duration of the bond.
In Kenya, how can treasury bonds create money?
Treasury notes are sold at a discount, which allows investors to profit. If you invest in a 91-day Treasury bill, for example, you will pay less than the bill’s face value at first, but you will receive the entire face value after 91 days. A minimum investment of Kshs. 100,000 is required to purchase a Treasury bill.
How do you profit from Treasury bonds?
- The first option is to keep the bonds until they reach maturity and earn interest payments. Interest on bonds is typically paid twice a year.
- The second strategy to earn from bonds is to sell them for a higher price than you paid for them.
You can pocket the $1,000 difference if you buy $10,000 worth of bonds at face value meaning you paid $10,000 and then sell them for $11,000 when their market value rises.
There are two basic reasons why bond prices can rise. When a borrower’s credit risk profile improves, the bond’s price normally rises since the borrower is more likely to be able to repay the bond at maturity. In addition, if interest rates on freshly issued bonds fall, the value of an existing bond with a higher rate rises.
Treasury bonds pay interest on a regular basis.
On a semi-annual basis, Treasury bonds pay a set interest rate. State and municipal taxes are not applied to this interest. According to TreasuryDirect, it is, however, subject to federal income tax.
Treasury bonds are long-term government securities with a maturity of 30 years. They collect income until they mature, and when the Treasury bond matures, the owner is also paid a par amount, or the principal. They are marketable securities, which means they can be sold before maturity, as opposed to non-marketable savings bonds, which are issued and registered to a specific owner and cannot be sold on the secondary financial market.
In Kenya, are Treasury bonds taxable?
A treasury bond (T-bond) is a government-issued medium- to long-term instrument. Until the bond matures, they usually pay interest every six months. Kenyan Treasury bonds are issued on a monthly basis.
T-bonds can be purchased by anyone or any organization with a CDS account with the central bank and a bank account. (Please notice that this CDS account is separate from the one for stocks.)
A CDS account is one that keeps track of the ownership of your securities (in this example, bonds/bills) as well as any transaction history you have when you buy or sell them.
1. Bonds with a fixed couponthe majority of government bonds have a fixed coupon. The interest rate on these bonds will not fluctuate over the life of the bond, therefore the semiannual interest payments will remain the same.
The coupon rate is the interest rate paid by bond issuers on the face value of the bond. It’s the interest rate that bond issuers pay to bond buyers on a regular basis. The face value of the bond is used to compute the coupon rate. The face value of a bond is the amount paid by the issuer to the bondholder when the bond matures.
You will earn KShs 5,000 every six months if you invest in a 10-year bond with a face value of KShs 100,000 and a coupon rate of 10%. Because the interest will be subject to a 15% withholding tax, you will receive KShs 4,250 every six months.
2. The government uses infrastructure bonds to fund infrastructure projects. Because the returns on these bonds are tax-free, they draw a lot of market interest in Kenya.
You will earn KShs 5,000 every six months if you invest in a 10-year infrastructure bond with a face value of KShs 100,000 and a coupon rate of 10%. Your interest will not be subject to Withholding Tax, unlike other bonds, and you will receive your KShs 5,000 semi-annually.
3. Zero coupon bonds are comparable to Treasury bills in that they are sold at a reduced price and do not pay interest. (See my Tbills note for more information.) Zero-coupon bonds are a rare occurrence.
The Central Bank offers free CDS accounts at its branches in Nairobi, Mombasa, Kisumu, Eldoret, and the Currency Centres in Meru, Nakuru, Nyeri, and Kisii (recently opened). You’ll need to fill out the mandate card, which includes your bank information among other things. Two signatories from your bank must sign the document to certify the information. You can get confirmation from any branch of your bank, not just your own.
The application procedure can be completed in one day, but it may take longer if you do not have all of the essential papers. Please read https://www.centralbank.go.ke/securities/treasury-bonds/ for further information.
In most cases, your CDS account is processed within 7 days (There has been some delays recently due to the effect of the COVID-19 pandemic limiting the number of staff going to the office)
You will receive a text message/email from CBK telling you that your CDS account is available and providing you with your account number.
Kenyan Treasury bonds are currently available in tenors (lengths of time) ranging from two to thirty years.
You can invest in the primary or secondary markets by purchasing bonds. The primary market relates to new government issuance or reopening, and the secondary market refers to purchasing bonds that are already listed on the NSE. (This is analogous to buying stock during an IPO or stock that has previously been listed on the NSE.) The initial public offering (IPO) is the primary bond market.
The Central Bank publishes the prospectus, which contains information on the offer size, coupon rate, duration of sale, issuance method, how to bid, and the auction date, among other things. (A prospectus for bonds on offer in January is included; the 2-year issuance period has already expired, but the infrastructure bond is still available until January 19th.)
The bonds available for sale, as well as the auction results, can be seen at https://www.centralbank.go.ke/bills-bonds/treasury-bonds/.
The fixed coupon bond requires a minimum investment of KShs 50,000, while the infrastructure bond requires a minimum investment of KShs 100,000. Trading on the secondary market (at the NSE) is done in multiples of KShs 50,000.00.
If you don’t want to open a CDS account with the Central Bank, you can still invest in Treasury Bonds through your commercial bank, but you’ll have to pay a fee in most situations. Some banks (such as Standard Chartered) have also provided avenues/services through which their customers can purchase bonds.
Kenyans living abroad who have an active Kenyan bank account can invest in government securities. They can open a CDS account and send the Central Bank any relevant forms via email.
CBK just launched Treasury Money Direct, which allows you to place orders using your mobile phone (previously you were required to submit physical bids to CBK).
You state the rate you are ready to accept for the money you are lending in competitive bidding. If you plan to invest more than KShs 20 million, you must participate in a competitive bidding process.
You accept the average rate of the accepted offers in non-competitive bidding.
On auction day, the Central Bank’s Auction Management Committee (AMC) meets and establishes the cut-off rate they are ready to accept after examining all received bids. Bids that are within the cut-off rate are accepted, while those that are over the rate are rejected in competitive bidding. You will receive the average rate of all accepted bids if you choose the uncompetitive bid.
CBK will send you an SMS or email once the auction is finished, usually the next day, informing you of the results of your bid.
If you are successful, they will offer you the amount you must pay, a reference number, and a deadline by which you must pay; usually the following Monday (unless it is a public holiday). It is critical to ensure that you have the funds in your account before applying for the bond.
Cheques for amounts less than KShs 1 million are accepted by CBK. A bank transfer will be necessary for amounts greater than one million dollars. You’ll deposit the funds into your CBK account in the same way as you would any other bank transfer. Successful applicants who do not make payments within the specified time frame may be prevented from investing in government securities in the future.
Treasury bonds normally pay interest (coupon) every two years. The dates on which interest will be paid until the bond’s maturity are listed in the prospectus. On the stated dates, interest will be credited to your bank account.
The investor will get the last interest amount and the face value of the Bond upon maturity, which will be credited to the bank account specified when the CDS account was opened. You can, however, issue CBK rollover instructions to use your proceeds to buy another forthcoming bond.
1. Investing in T-bonds carries little or no danger of default (Governments rarely default).
2. Investing in T-bonds gives a predictable income source (you are almost guaranteed of receiving your interest every 6 months)
3. Safer investment than stocksTreasury bonds appeal to risk-averse investors who seek lower-risk investments.
4. Treasury bonds in Kenya are listed on the Nairobi Stock Exchange (NSE) and so provide an exit strategy if the bond is needed to be sold before maturity.
5. In most cases, treasury bonds outperform treasury bills in terms of yield.
6. Long-term bonds (up to 30 years) are available in Kenya, allowing investors to save for longer-term goals such as retirement or children’s education.
7. Infrastructure bonds are not subject to withholding tax, resulting in a higher yield.
T-bonds are auctioned on a monthly basis, making them a viable investment option for those looking to develop a portfolio that pays interest even on a monthly basis.
1. Treasury bonds aren’t insured against loss of principal. This implies that their price on the NSE might fluctuate, and if you sell your bond before it matures and the price has dropped, you may receive less than you invested.
2. Long-term investment: If you buy a 30-year bond and do not wish to sell it, you may have to wait up to 30 years for the bond to mature.
3. Fixed coupon bonds demand a minimum investment of KShs 50,000, whereas infrastructure bonds require a minimum investment of KShs 100,000, which may be too expensive for certain investors.
4. On the secondary market, the bonds are sold in multiples of KShs 50,000. (NSE). This implies you can’t buy or sell anything for less than 50,000 dollars, and anything higher than that must be in multiples of 50,000 dollars, such as 100, 150, 200, and so on.
5. Because interest rates are determined by demand and supply, when the government has less demand or the supply of investors is high, the rate of interest offered may be reduced.
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Is it wise to invest in Treasury bonds in Kenya?
Treasury bonds are a safe, medium- to long-term investment that pays interest every six months for the duration of the bond’s life. In Kenya, the majority of Treasury bonds are fixed rate, which means that the interest rate set at auction is guaranteed for the duration of the bond.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
Is bond investing a wise idea in 2021?
Because the Federal Reserve reduced interest rates in reaction to the 2020 economic crisis and the following recession, bond interest rates were extremely low in 2021. If investors expect interest rates will climb in the next several years, they may choose to invest in bonds with short maturities.
A two-year Treasury bill, for example, pays a set interest rate and returns the principle invested in two years. If interest rates rise in 2023, the investor could reinvest the principle in a higher-rate bond at that time. If the same investor bought a 10-year Treasury note in 2021 and interest rates rose in the following years, the investor would miss out on the higher interest rates since they would be trapped with the lower-rate Treasury note. Investors can always sell a Treasury bond before it matures; however, there may be a gain or loss, meaning you may not receive your entire initial investment back.
Also, think about your risk tolerance. Investors frequently purchase Treasury bonds, notes, and shorter-term Treasury bills for their safety. If you believe that the broader markets are too hazardous and that your goal is to safeguard your wealth, despite the current low interest rates, you can choose a Treasury security. Treasury yields have been declining for several months, as shown in the graph below.
Bond investments, despite their low returns, can provide stability in the face of a turbulent equity portfolio. Whether or not you should buy a Treasury security is primarily determined by your risk appetite, time horizon, and financial objectives. When deciding whether to buy a bond or other investments, please seek the advice of a financial counselor or financial planner.
Are bonds safe in the event of a market crash?
Down markets provide an opportunity for investors to investigate an area that newcomers may overlook: bond investing.
Government bonds are often regarded as the safest investment, despite the fact that they are unappealing and typically give low returns when compared to equities and even other bonds. Nonetheless, given their track record of perfect repayment, holding certain government bonds can help you sleep better at night during times of uncertainty.
Government bonds must typically be purchased through a broker, which can be costly and confusing for many private investors. Many retirement and investment accounts, on the other hand, offer bond funds that include a variety of government bond denominations.
However, don’t assume that all bond funds are invested in secure government bonds. Corporate bonds, which are riskier, are also included in some.