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Investing in treasury bills, bonds

By Vision Reporter

Added 24th April 2012 06:13 PM

There are probably very few investments that can be classified as safe and risk free. This is what makes investing in government securities (Treasury Bills and Bonds) a very attractive prospect, especially for conservative investors.

Investing in treasury bills, bonds

There are probably very few investments that can be classified as safe and risk free. This is what makes investing in government securities (Treasury Bills and Bonds) a very attractive prospect, especially for conservative investors.

By Sylvia Juuko

...Government securities are risk-free and can be used as collateral to get  loans

There are probably very few investments that can be classified as safe and risk free. This is what makes investing in government securities (Treasury Bills and Bonds) a very attractive prospect, especially for conservative investors.

 Investing in government securities that are issued by Bank of Uganda (BOU) on behalf of the Government not only guarantees that you get back your investment at maturity but also earns you good interest. These instruments (Treasury Bills) are structured in three maturities: 91-days, 182-days and 364-days and issued every fortnight. Treasury Bills are issued at a discount and offer a competitive rate of return.
 
Treasury Bonds on the other hand are long-term debt instruments and are issued by BOU every 28 days. Currently there are two, three, five and and 10-year bonds.
 
 You can invest in Treasury bills and bonds with a minimum of sh100,000. What you need to do is open a Central Depository System (CDS) account at Bank of Uganda by filling CDS Form 1, CDS Form 7, CDS Form 9A/B, CDS Form 8(if it’s an organisation) and sign a CDS Dealing Agreement.
 
You then have to submit these account opening forms through your primary dealer bank for their endorsement and know-your-customer purposes. These forms are available at BOU and on www.bou.or.ug as well as from the primary dealer banks. 
 
To participate in an auction, a registered investor submits bid orders through a primary dealer. These are commercial banks appointed by BOU and include:  Stanbic Bank, Standard Chartered Bank, Barclays Bank, dfcu bank, Bank of Baroda and Centenary Bank.
 
Depending on the option you choose, you should consider the shilling volume of your bid. This will determine whether you will participate under the competitive bids or non-competitive bids.
 
The difference between competitive and non-competitive bids is that with the former, you must indicate the rate/price you would like to earn on your money invested and the bid must be above sh10m. On the other hand, non-competitive bids range from sh100, 000 to sh10m and the investor does not choose his own interest rate when bidding; non-competitive bidders take a market determined average rate from the auction. In this regard, all bids must be submitted through a primary dealer and must reach the BOU headquarters by 10.00am on the day of the auction.
 
 Regarding payment, all successful bids must be paid for on the next business day after the auction. The primary dealer is responsible for payment of all the bids of his participants (individuals and organisations).
 
 Most investors are usually keen on the level of interest earned on government securities. Dealers will tell you that the interest rate an investor earns is variable and can only be determined and fixed on the day you are investing. For example, if you had invested sh100,000 during the April 04 auction, the interest rate on one-year treasury bills was 20.147%. This means that sh100, 000 would have yielded you a profit of sh16, 727 at the end of the one-year period.
 
 Treasury Bonds offer equally a competitive return and the interest earned will depend on the coupon interest rate and whether the bond is bought at a discount or premium. If a bond is priced at a discount, it means that it is bought at a lower price than its face value and therefore aside from the semi-annual coupon interest, additional discount interest income is earned at the end of the life of the bond.
 
For par value bonds, the investor earns only the semi-annual coupon interest and, for premium bonds, the investor pays more than the face value on the day of investment and his earnings are the semi-annual coupon payments through the life of the bond. If you have chosen to invest in Treasury bonds, whether purchased at discount or at par or at premium, the BOU will pay coupon interest every after six months directly to an investor’s bank on each interest day.
 
 What makes government securities attractive is that they are a safe and risk-free investment and can be used as collateral for securing loans and other transactions. They are also considered as a saving mechanism and offer a competitive rate of return.
 
Just like any investment option, you need to have in mind your objectives and your current financial situation. It’s also critical that you do research and ask as many questions as possible to make an informed investment decision. You also have to be aware that any investment option has an opportunity cost.
 
Therefore, you can opt for these instruments especially if the rate of return is better than the options available and of course, taking into account the prevailing and expected future rate of inflation. It is also advisable to consider this investment option as part of a bigger portfolio of other asset classes.
 
The writer works with Bank of Uganda
 

 

Investing in treasury bills, bonds

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