Investing in Treasury bonds

Once you decide to become a bond investor, you will face a series of decisions on what bonds to buy, how best to buy them, how long you want to hold them in your portfolio and when you might think about selling bonds.

Once you decide to become a bond investor, you will face a series of decisions on what bonds to buy, how best to buy them, how long you want to hold them in your portfolio and when you might think about selling bonds.

You can decide to sell them at your convenience since bonds are transferable. By this, I mean you can sell the bond and the buyer will be the new holder. The change of ownership will be arranged by the issuer e.g. Central bank (Government agent) by preparing and issuing a certificate of ownership for and on behalf of the Government.

What is a bond?

A bond is a debt security that is acknowledgement of a debt. So it acts as an agreement between the parties involved in purchasing the bond and the issuer. When you purchase a bond, you are lending money to government, municipality, corporation, or any other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it "matures," or comes due.

How do you get information concerning treasury bonds (TB)?

Watch-space in the news papers and other media for a press release, usually ran one week before auction, and then find a prospectus, typically issued by the National Bank of Rwanda (NBR).

A prospectus

Offering statement, or prospectus; refers to the document that contains necessary details for the Treasury bond. It is the official document that explains the bond’s terms and features, as well as risks that investors should know about before investing. Note that for Government securities, like this offered by the Government of Rwanda through The National Bank of Rwanda, has purely no risks that is— "Risk-free", since they are guaranteed by the government. If you’re interested in purchasing a new bond issue therefore, your investment advisor will provide you with the security’s offering statement, or prospectus. This will thus suitably guide you.

How do you buy bonds?

You use brokers once they are there and registered, some financial institutions will provide their clients with the service of transacting government securities. Bidders fill forms which are available on the National Bank of Rwanda (NBR) website, then submit the forms to NBR through their licensed commercial banks. Institutional investors, with accounts at the National bank, can deposit their forms direct to the National Bank of Rwanda. Institutional investors are investors that manage funds invested by individuals, such as insurance companies and pension funds (CSR).

You can also buy and sell bonds which have already been issued. This is known as the secondary market. Bonds sold on the over-the-counter (OTC) market are usually sold at Frw50 million for competitive bids, and Frw100, 000 for non competitive bids.

Listing

You however need to be listed on the Over- the counter market by the Capital Market Advisory Council (CMAC).

Raising funds by issuing bonds

You may have borrowed money and of course most of us have. Just, as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programmes. The problem large organisations run into are that; they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments).

From thousands of investors, each lends a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organisation that sells a bond is known as the issuer. In this case the Treasury bond is issued by the Government of Rwanda.

Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon.

Coupons

Are the interest rate stated on a bond when it’s issued. The coupon is typically paid semi annually. This is also referred to as the "coupon rate" or "coupon percent rate". For example, an Frw100,000 bond with a coupon of 8 per cent will pay Frw8,000 a year, thus paid Frw4, 000 semi-annually. It is called a "coupon" because some bonds literally have coupons attached to them. Holders receive interest by stripping off the coupons and redeeming them. The date on which the issuer has to repay the amount borrowed (known as face value is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you’ll get back if you hold the security until maturity.

Face value

Face value is the nominal value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity.

sebasore@yahoo.com

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