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Treasury Bonds are medium to long term debt instrument issued by the government to raise money in local currency for a period of more than one year. So far, Treasury Bonds that have been issued are of maturities range of 1 year to 20 years.
The types of Treasury bond may be defined by the purpose, interest rate structure, maturity structure, and even by issuer. So far, the Government has issued Fixed Coupon/Rate Bonds, Zero Coupon, Floating Rate, Infrastructure (project specific), Restructuring/Special bonds and Amortized bonds. Most commonly issued bonds are zero coupon and fixed coupon bonds which have huge investor demand. Treasury bonds are issued monthly.
Fixed coupon Treasury bonds – Bear predetermined fixed coupon (interest) which is semiannually based on the face value held during the life of the bond. When bought at a discount, investor benefits from discount (capital gain) which is critical for secondary market trading and regular interest payment.
Infrastructure bonds – Proceeds are used to fund specific infrastructure/projects specified in the prospectus.
Floating Rate Bonds – Pay semiannual interest based on a benchmark rate, for example average rate of 91-days or 182-days Treasury bill plus some margin. They are on high demand in high inflationary environment. They are no longer issued by the Government since 2001, most corporate bodies issue them.
Zero Coupon Bonds – Do not have fixed interest and investor’s return is only the discount amount equivalent to the yield quoted. Mostly short term and most taken up by commercial banks. Pricing is similar to the Treasury bill.
- Resident or non-resident individuals and/or corporate bodies who holds an account with a local commercial bank
- Resident or non-resident individuals and/or corporate bodies who may not have an account with a local commercial bank but invests as a nominee of a commercial bank or investment bank in Kenya
- Resident or non-resident individual and/or corporate bodies that has CDS Account with Central Bank of Kenya
- Minimum face value of Ksh 50, 000, additional values MUST be in multiples of Ksh. 50,000 except for Infrastructure bonds whose minimum investible amount is Ksh 100,000.
- Must complete Treasury Bonds application form and submit to Central Bank (or branches) on or before 2.00pm on Tuesdays of the last week of bond (s) sale. The closing date of the sale period is indicated in the bond prospectus.
The price of a bond is determined by the time to maturity (t), the coupon rate and the quoted yield to maturity. - Discount price- This is when the offer price falls below face/par value. In this case, the quoted yield is higher than the coupon rate.
- Premium – This is when the offer price is above the face/par value. In this case, the quoted yield is lower than the coupon rate. Investors paying premium price pay more at initial investment.
- Par price – This is when the offer price equals the face
value. In this case, the quoted yield equals the coupon rate
- Capital gain/loss – Since Treasury bonds trade at the Nairobi Stock Exchange (NSE), investors may sell/buy them when prices become favorable. A capital gain is realized when the selling price at secondary market is higher than the buying price at primary (secondary) market. The reverse is true for capital loss.
- Reinvestment income - Assuming semi-annual coupons are re-invested at same or better yields than the coupon rate; the return generated from reinvestment at the favorable yield is the reinvestment income.
The yield on the bond is generated using the Net Present Value formula as follows;
Where;
P = Price per
Kshs 100
I = Semiannual
interest payments (coupons)
F = Face Value
(Ksh 100)
r = Quoted yield
(semiannual)
n = Number of
semiannual interest periods in a bond’s life
The Day Count Convention for pricing Treasury bonds in Kenya is 364 days. From
the formula above, if an investor quoted;
- A yield = coupon rate, the result is par price
- A yield > coupon rate, the result is a discount price
- A yield < coupon rate, the result is a premium price
Illustration
Investor intents to invest
in a two-year Treasury bond offered at 8.75% coupon rate. Assuming no withholding
tax payable by the investor, below are three scenarios if he quotes premium,
par or discounted price:
(a) Scenario 1: Premium Price – Quoted Yield at 8.5%
For Ksh 1000,000 investment, the investor will be required to pay Central Bank
Ksh 1,004,510 on value date, but receive Ksh 1,000,000 on maturity date. This
implies a premium of Ksh 4,510 the investor pays. The periodical coupon payment
of Ksh 4.375 par 100 is however based on the face value of Ksh 1,000,000 and
NOT the Ksh 1,004,510 the investor paid.
(b) Scenario2: Price at Par – Quoted Yield at 8.75%
For Ksh 1,000,000 investment, the investor will pay Central
Bank Ksh 1,000,000 and receive same amount on maturity date. The periodical
coupon payment of Ksh 4.375 par 100 is based on the face value
of Ksh 1,000,000.
(c ) Scenario 3: Discount Price – Quoted Yield at 9%
For Ksh 1000,000 investment, the investor will be required to pay Central Bank
Ksh 995,520 on value date, but receive Ksh 1,000,000 on maturity date, implying
a discount amount Ksh 4,480 the investor receives in advance. The periodical
coupon payment of Ksh 4.375 per 100 is however based on the face value of Ksh
1,000,000 and NOT the Ksh 995,520 the investor paid. Therefore investor has
two gains – coupon payment and discount.
This is where a bond originally issued in the market is reopened /reoffered
to the market on any date after the value date. If reopening occurs on interest
payment date, the price payable by investors is the clean price. However, if
reopening takes place on a date other than an interest payment date, the settlement
price is the dirty price which includes accrued interest. Reopening is used
as bond market deepening strategy.
Example 1: Reopening
at exact interest payment date
A 20-year bond originally issued on June 30th 2008 is reopened on June 30th
2009. Given the following features:
Issue Number: FXD 1 /2008/20
Value Date: 30/06/2008
Term: 20 Years Maturity
Date: 05/06/2028
Original Amount Offered: Ksh 15,000mn
Coupon Rate: 13.75% p.a.
Last Interest Payment: 29th December 2008
Next Coupon Payment Date: 30/06/2009
Reopening Date: 30/06/2009
Time to Maturity: 19 Years
Accrued Interest: 0
And the following formula used to calculate its price:
Where:
P = Clean Price derived from yield quoted by
investor = Dirty Price (DP) - Accrued Interest (AI)
I = Periodical Interest Payable = 6.875
γ = Quoted by the Investor = 13.75/2 =
0.06875
FV = Face Value = KShs 100
δ = Days between last coupon payment and
opening date
Where:
Example 2: Reopening
on a date other than Interest payment date
A 2-year bond originally issued on May 25th 2008 is reopened on June 29th 2009.
Given the following features:
Issue Number: FXD 2 /2009/2
Value Date: 25/05/2009
Term: 2 Years
Maturity Date: 23/05/2011
Original Amount Offered: Ksh 2,695.2mn
Coupon Rate: 8.75% p.a.
Last Interest Payment: None Next Coupon Payment
Date:
23/11/2009
Reopening Date: 29/06/2009
Time to Maturity: 1.9038 Years
Years Accrued Interest: Kshs 0.841
And the following formula is used to calculate its price:
Where:
Where:
P = Clean Price derived from yield quoted by
investor = Dirty Price (DP) - Accrued Interest (AI)
I = Periodical Interest Payable = 4.375
γ = Quoted by the Investor = 0.0875/2 =
0.04375
FV = Face Value = KShs 100
δ = Days between last coupon payment and
opening date
Where:
So that;
P= Kshs 97.630
AI = Kshs 0.841
DP = Kshs (97.630 + 0.841) = Kshs
98.471
Note: The final settlement price payable by investors is the
Dirty price plus withholding tax.
Note however that withholding tax is computed on the clean
price.
For ease of calculating prices, the Central Bank includes a yield table
in the prospectus for the T/bonds on offer. One can also use available on
Treasury bonds pricing calculator
Yes. Withholding Tax of 15% on Treasury bonds of less than 10 years and 10% on Treasury bonds of more than 10 years is charged on the discount as well as periodic interest payment, unless an investor is tax exempt, in which case a tax exemption certificate must be provided or the investor has made arrangements to pay tax directly to the Kenya Revenue Authority (KRA). Infrastructure bonds as defined under CMA and KRA Acts however do not attract any form of tax.
The first step is to have a CDS account at Central Bank of Kenya. Currently, the government offers fixed coupon bonds of maturities ranging from 1-20 years. Treasury bonds are sold (auctioned) once every month. The minimum amount required to invest in a treasury bonds is Ksh 50,000.00 and any additional amounts in multiples of Kshs 50,000.00. To purchase treasury bonds, investors must submit correctly and fully filled Treasury Bonds application forms at any branch of the CBK.
- The Auction Management Committee (AMC) meets on the Wednesday, following the date of closure of bond sale, at 4.00 p.m. to conduct the auction and determine successful bidders.
- After considering all bids both competitive and non-competitive bids received, AMC arrives at a cut-off rate based on amounts advertised
- The successful weighted average rate derived from competitive bids is applied to all non-competitive bids and is published with the rest of results in Daily newspaper.
- The Central Bank reserves the right to allocate the equal or lower amount of Treasury Bills applied for by an investor.
Being a paperless security i.e. no physical certificate, Investors receive a statement showing their holdings in the Central Depository (CDS) registry at the Central Bank.
YES. Treasury bonds are traded at the Nairobi Stock Exchange. In addition, investors may pledge them as collateral (or for lien creation) security against credit facilities (loans), and may also be transferred among holders of CDS accounts. CDS Statements are adjusted accordingly to reflect these transactions. Commercial banks also use them as collateral for liquidity management through Repurchase Agreements (Repos) and Intraday Liquidity Facility (ILF).
Investors who do not wish to hold their bonds until maturity and are unable
to sell them at the secondary market are allowed to sell back (rediscount) the
bonds to Central Bank as a last resort. This is however punitive to the investor
as a way of discouraging the practice. The following formula is used to calculate
amounts receivable (A) by investor:
Where;
RP = Rediscount
Price per Kshs 100
I = Semiannual
interest payments (coupons)
F = Face Value
(Ksh 100)
R = Rediscount
rate (semiannual)
n = Number of
semiannual interest periods remaining to bond’s maturity
Note:
Where;
A = Amount receivable
F.V. = Face
value Invested
RP = Rediscount
Price
- The Central Bank remits the face value of maturing bond directly to the investor’s commercial bank account on due date electronically. The investor’s CDS account is debited by the same value of the security and statements are sent to the investor showing new position.
- Investors may however choose to rollover their security into a new forthcoming issue and in this case, they have to complete the application form giving rollover instructions and submit it to Central Bank, before closure of the period of sale for that bond, at 2.00 p.m. The Bank therefore does not remit face value into investor’s account but rather send only refunds amounts generated from new investment.
- If the security is still held under lien on maturity date, the Bank will remit funds in the account of the holder of the security (the lender of cash).
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