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The advantages of investing in bonds.

18 May

Shares are high-risk, but can give very good returns or cost you all of your savings, whereas bonds are mostly lower risk and generally not very correlated to stocks and do pay an income. A balance between these securities is usually the best bet, Having a well-balanced portfolio is just as important as having a well-balanced diet. Let us analyze why it pays to invest in bonds. Kenyans have been known to be good at investing in shares but we have a long way to go in relation to bonds, asset backed securities and other modern financially engineered investment vehicles like futures, swaps, forward contracts and so on….

The bond market has witnessed increased liquidity and high turnover due to automation of trading and settlement at NSE, lengthening of the Government bonds maturity to 30 years, and a stable yield curve due to the issuance of benchmark bonds, among other reforms. We all know that vibrant bond market will help the country mobilize long term savings and capital needed to meet the aspirations of transforming Kenya into a middle income country as espoused in the Vision 2030 Economic Blueprint, and this can only be achieved through massive participation.

So what is a bond and how does it differ from shares

These are long term fixed interest securities issued by government and corporate bodies. In effect, they are promissory notes in which the issuer (the borrower) makes an obligation to pay interest at specified times and intervals and to pay back the principal at maturity of the Bond. The holders of bonds get interest even if the issuer does not make profit unlike whilst invested in stocks where bonus are only guaranteed when profits are ample to meet internal financing and at the discretion of the management.

There are many different types of bonds. Treasury Bonds These are debt instruments issued by the Government of Kenya  to finance budgetary goals and were introduced in the Secondary Market over 10 years ago. They are available in both the primary market (through auctions) and the secondary market (through the NSE). An investor needs at least Kshs. 50,000 to purchase bonds in Kenya.
Corporate Bonds These are long-term (at least one year and above) debt instruments issued by the private sector . Issuers of this instrument targets high net worth investors who understand technical information about pricing, valuation, yields etc. This implies that this product is not completely open to every individual or institutional investor. Like Treasury Bonds, an investor needs at least Kshs 50,000 to purchase this product. We also have other types of bonds namely Convertible bonds, infrasture bonds, eurobonds and so on

Bonds and stocks are both securities, What are the major difference between the two:

  • Stockholders have an equity stake in the company (They are owners), whereas bondholders have a creditor stake in the company (are lenders)
  • Bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely(Though we have perpetual bonds)

Advantages over shares

  1. safe haven for your savings– investing in debt is safer than investing in equity because of priority that debt holders have over shareholders. If a company goes bankrupt.
  2. predictable returns over time– share prices fluctuates over time unlike bonds- during the stock market crisis bonds always out performs shares
  3. High interest income– bonds pay higher interest than what banks pay on savings accounts. instead of keeping your money in a saving account you better invest in bonds especially if not planning to spend them in any soon
  4. Diversity in investment- bond provide better avenues for diversification- But the question is just how much should i put in bonds? Quite often you’ll hear an old rule that says investors should formulate their allocation by subtracting their age from 100. The resulting figure indicates the percentage of a person’s assets that should be invested in stocks, with the rest spread between bonds and cash. According to this rule, a 20-year-old should have 80% in stocks and 20% in cash and bonds, while someone who is 65 should have 35% of assets in stocks and 65% in bonds and cash

how do you go about investing in bonds: what are the requirements in kenya ?

Who can invest in Treasury bills in Kenya?

  1. Resident or non-resident individuals and/or corporate bodies who hold an account with a local commercial bank
  2. 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
  3. Resident or non-resident individual and/or corporate bodies that has CDS Account with Central Bank of Kenya
  4. Any potential investor must have a minimum face value of Ksh.100, 000. Any additional amounts MUST be in multiples of Kshs. 50,000

How and when do I invest?

  1. Any potential investor must have an active and updated a CDS account at Central Bank of Kenya.
  2. Treasury bills are sold weekly, with 91 days and 182 days papers being issued in alternate weeks. Each new offer is advertised in the Daily Nation Newspaper on Fridays.
  3. Investors MUST correctly and appropriately complete Treasury Bills application form available at the Central Bank of Kenya head office Nairobi or any of its branches in Eldoret, Kisumu and Mombasa.
  4. The duly completed application form must be submitted to Central Bank (or branches) on or before 2.00pm on Thursdays.
  5. Investors may place their application either as competitive or non-competitive (average) bids. Competitive bidders MUST indicate the desired price/yield and usually understand the movements in interest rates and market conditions. However, such bids may either be accepted or rejected depending on interest rates and liquidity levels. Non-competitive bidders on the other hand only indicate ‘Average’ or ‘Non-Competitive’ in the place of offer price per Ksh 100 in the application forms. Since this category is a price-taker of market outcome (successful weighted average rate), their placement is guaranteed. However, maximum amount one can invest per CDS account per issue/tenor is Ksh 10,000,000.
  6. Application forms should be deposited in the blue tender boxes marked “Treasury bills” at any branch of Central Bank by 2.00p.m on Thursdays.

for more information.

www.centralbank.go.ke/securities/bills/Introduction.aspx

The bond market turnover increased from Kshs 110 billion in 2009 to over Kshs 480 billion in 2010. Consequently, the bond turnover as a ratio of GDP has increased substantially from 5 percent in 2009 to 17.5 percent in 2010. This is a clear demonstration that our capital market has high potential to support the financing needed to boost our investments.

@wesonga

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21 Comments

Posted by on May 18, 2011 in Financial

 

Tags: , , , , , ,

21 responses to “The advantages of investing in bonds.

  1. John

    June 18, 2013 at 6:48 pm

    Hi,

    Please could you provide instructions on how to purchase bonds on the secondary market? For example if I want to purchase the infrastructure bonds that were issued in 2009, 2010 and 2011, how do I buy them on the secondary market via the NSE?

    Thank you,

    John

     
    • whesongerwealth

      August 26, 2013 at 6:09 am

      Hi John,

      That is a great Move. Kindly visit your broker(a member of NSE) to get first hand information on how and when to do the investment.
      And for which security to purchase Central Bank Of Kenya do advertise in the dailies the available bond or treasury bills on sale.
      Check out Reliable Securities Ltd (Old Mutual Securities Ltd) along kimathi street,IPS Bldg 6th Flr
      Dyer an byer investment bank.
      Africa alliance
      Are among the investment brokers you can pay a visit.

       
  2. EK Voetbal

    May 28, 2012 at 9:54 am

    This is a great blog!!! I like your article very much and I’ll subscripe to it if you post more articles like this! Do you like EK Finale or do you wanna know the EK Uitslagen take a look on my profile!

     
  3. GPS tracking device reviews

    May 20, 2012 at 9:35 am

    Magnificent beat ! I would like to apprentice while you amend your site, how could i subscribe for a weblog site? The account aided me a applicable deal. I were a little bit acquainted of this your broadcast offered vibrant transparent concept

     
  4. shah javin

    June 15, 2011 at 7:33 am

    The CBK is busy advertising new issues of bills and bonds. How can one go about to invest in bonds.

     
    • whesongerwealth

      November 23, 2011 at 12:10 pm

      Currently smart investors have put their savings into the treasury bills. currently their are a number of issues on offer check them out at cbk

       
  5. evans

    June 15, 2011 at 7:16 am

    CBK has issued more securities… TBILLS and BONDS

     
    • whesongerwealth

      November 23, 2011 at 12:11 pm

      Go for them

       
      • kavita cleopas

        April 18, 2012 at 9:34 am

        this seems the better way out

         
        • whesongerwealth

          May 14, 2012 at 6:22 am

          hawayu where are investing currently

           
        • whesongerwealth

          May 17, 2012 at 7:06 am

          Yap. you can never be sure with the investment strategy

           
  6. Angela Banning

    May 30, 2011 at 2:43 am

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    We now have hundreds of surveys that need your insight. Anyone can take part. So if you have some spare time, and can use a little additional cash, please visit http://input.ncsall.org and begin!

     
  7. test blast

    May 22, 2011 at 5:28 am

    Gonna be giving Bonds a Test soon

     
  8. Moses

    May 21, 2011 at 9:54 am

    brokers and our investment bankers have made trading bonds on NSE a nightmare for individual investors preferring corporate investors yet more money can only come to the bourse through the inclusion of individual investors as was the case with safaricom IPO. otherwise thanks i have learnt.

     
    • whesongerwealth

      May 21, 2011 at 10:10 am

      @moses we cant entirely blame the our financial advisors on the same. kenyans uptake of bonds issues is picking up.

       
    • richards

      June 13, 2011 at 7:55 am

      safaricom IPO was the biggest openner of the NSE

       
  9. Naomi

    May 20, 2011 at 12:08 pm

    Whesongerwealth, keep up the good work, you are a blessing to the many that require the knowledge that they so need and you are providing in details…big up

     
    • whesongerwealth

      May 21, 2011 at 10:19 am

      just sharing to them what the society demands we know. we all have something to teach someone else

       
  10. MARCY

    May 18, 2011 at 2:31 pm

    Good post in fact kenya in east africa has made good strides

     
    • whesongerwealth

      May 18, 2011 at 3:15 pm

      Though not many kenyans do trade in bonds they’re traded by the institutional investors

       

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