Many of us are looking for some way to grow our money. Some are
thinking of Businesses but may not be business minded or do not know
which one to undertake or others keeping their money idle in Banks
with Little interest earned. Today, I would love to introduce you and
simplify what are known as Government Securities (Bonds and Treasury
bills). This is going to be a question and answer simplification.
WHAT ARE KENYA GOVERNMENT SECURITIES?
These are debt instruments issued by the Government of Kenya through
the central Bank of Kenya. Hmmm confusing right? This simply means
that the government is borrowing money from you, yes you. So you lend
the government your money and then they pay back with benefits
(interest).
SO IN WHAT FORM CAN I LEND THE GOVERNMENT MY MONEY?
There are mainly two debt instruments used namely the Treasury bills
and Government Bonds. Treasury bills are known as short term debt
instruments and are used when the government is borrowing money for
one year or less. So if you want to lend your money for less than a
year (91 Days, 182 days, 273 days and 364 days) treasury bills are
used. Bonds on the other hand are long term debt instruments and are
used when the government is borrowing money for a period exceeding one
year and have six maturity periods namely 2 years, 3 Years, 5 years, 7
years, 10 years and 15 years.
TELL ME ABOUT TREASURY BILLS AND BONDS, HOW DO I EVEN BENEFIT?
Treasury bills are always bought at a price less than the actual value
of the instrument and the interest is actually the difference between
the actual value of the instrument and the price you buy it at.
Example, you want you purchase a K1000 worth Treasury bill for 3
months. The selling price of the Bill could be let's say K880. On the
maturity day of the Bill, you will be paid a K1000 and that implies
the profit gained is K120 (K1000-K880). So under a Treasury bill, the
interest is the profit you make.
Government Bonds can be bought at a price less than, equal or more
than the value of the Bond. The government pays a fixed rate of
interest (called the coupon) every six months and then the value of
the Bond on the Maturity date. So here, there is an interest on the
value of the Bond and the Principal amount is paid at the end of the
deal (At maturity).
BUT HOW DOES THE GOVERNMENT BORROW FROM ME?
Like said earlier, the Central Bank of Kenya issues these instruments
on behalf of the government. There are basically two methods used. The
instruments are sold at auctions on a competitive basis and
non-competitivebasis.
Competitive basis means you compete with other potential investors to
lend money by specifying the interest and the value of the instrument
you want. This means that you tell the CBK that am willing to lend the
government with this amount of money and I want this interest for my
money. Of course, the Bank is likely to go for the lowest bidder and
so you have to be tactical as you bid, just like any other auction you
may think about.
Non-competitivebasis is one where you do not specify the interest rate
but you are willing to be allocated the securities at an interest rate
based on the results of the competitive auction. This means the fate
of your interest will be determined by those competing.
. For you, you wait for bidders to compete and then purchase the
securities at the agreed price and Interest.
WHO IS ELIGIBLE TO PURCHASE THESE SECURITIES?
There are no restrictions to eligibility. Individuals, foreign
entities, Business firms and institutions are all eligible to purchase
these securities. As long as you have more than the minimum money
required to invest, you are eligible.
Lastly, what are the benefits of investing in Government securities?
• Collateral – Government securities can be pledged as collateral for
a loan and accepted by all financial institutions
• Paperless – The records are stored and processed electronically
• Interest is certain – Usually governments do not default. You are
assured of receiving your due when it matures.
Be wise, make your money make more money for you. You may start at a
snail's pace but the distance you'll soon cover to achieve your life
time goals will be amusing and soar as high as an eagle. Just give
Government Securities a try.
