How to Invest in Government Securities

A Step-by-step Guide on How to Invest in Government Securities

Although government securities are some of the best ways of earning passive income, many Kenyans do not know how to invest in them. This is largely because of lack of knowledge on what government securities are and how to invest in them.

What are government securities?

They are low-risk investments with high returns, as they are supported by the taxing power of the government. It is one of the ways through which the government borrows money domestically from ordinary Kenyans or corporate institutions. This is done by placing or auctioning bids or offers in the form of treasury bills or treasury bonds.

Interestingly, many people don't know that they can loan the government their money (in the form of buying securities like Treasury Bills and Bonds) and in return get profit (in the form of interest/coupon).

Government Securities come in three forms: treasury bills, treasury bonds and commercial paper.

1. Treasury bills simply refers to money you lend the government for a period ranging 91 days, 182 days, 272 and 365 days.

2. Treasury bonds, on the other hand, constitute money you lend the government for a period ranging from 2 years to 30 years.

3. Commercial paper which refers to money you lend a financial institution.

Treasury bills are more common short-term and arguably more secure. An investor bids or buys directly via CBK and/or sells through a broker, bank or finance house at NSE. They are sold bi-weekly and are mostly reported on newspapers and the Central Bank of Kenya (CBK) website.

Treasury bonds are equally secure, predictable medium-to-long-term investments that offer interest payments after every six months throughout the tenor or maturity period. They are issued monthly and sold in minimum bundles of Kshs.50,000 except for infrastructure bonds that go for at least Kshs.100,000. They are safer and more secure than other securities in the financial markets.

Most of bonds have a fixed interest rate making them more predictable and reliable because the money hits your bank account at a specified set date for the entire life of the bond.

Bonds comes in three forms:

1. Fixed coupon bonds which offers regular interest recieved semi-annually.

2. Infrastructure bonds. The government through the Treasury occasionally issues tax-exempt infrastructure bonds to fund specified projects for example for a period of 10 or 20 years. They are very attractive because of being tax-free.

3. Zero coupon. They are similar to treasury bills issued for a short-time and are sold at a discount but have no interest payments.

How to Invest or Buy Treasury Bonds

1. You need to open a Central Depository Settlement (CDS) account with CBK, free of charge. This can be done by visiting CBK or any of its branches countrywide, pick an application form called mandate card, fill it in neat block letters, provide personal information such as details about your contact and commercial bank.

You need to complete the CDS account signature specimen, get two signatories from your bank to sign the mandate card to verify the information you have provided. You need to submit a coloured passport sized photo of yourself, certified and stamped by a representative from your bank. In addition, you will be required to fill out the email indemnity agreement which requires a witness and submit a clear copy of KRA PIN, your national ID, passport or alien certificate. Besides, you will be required to register for CBK-Treasury Mobile Direct (TMD) for specific mobile services on government securities.

Once you have done that you will wait a week or two before you're issued with a CSD account number that you can use to buy government securities directly through CBK or secondary market at the Nairobi Securities Exchange (NSE).

2. You have to decide how you want to invest in the securities. You need to consider an upcoming auction and how long you want to commit or invest.

3. You have to fill an application form collected from CBK and submit the completed form. The bond application details include: indicating the bond you want to buy such as Issue Number, duration and the face value amount you want to invest. Other details include: personal information. like your full name, phone number, CDS account, bank account number provided specified in the mandate card and whether the funds you're investing are coming from a local or offshore source. You will need to select the interest/coupon rate of the face value investment you will receive in semi-annual interest payments. You have the rollover option to facilitate re-investment or purchase of further securities instead of the money being sent to your bank account.

4. Getting auction results. The results of the auction bids or offers are published on the CBK website. You will be contacted for more updates or you can make the initiative to find out from CBK.

5. Payment. Investors submit their payments in amounts specified by CBK through cash or banker's cheques of the amount is less than Kshs.1M.

6. Maturity proceeds. As an investor you receive interest payments semi-annually in your bank account throughout the period of the bond. On maturity, you receive the last interest amount and face value of the invested amount. You can choose to rollover by filling a rollover instructions form.

Note.

In 2018, the government introduced M-Akiba at 10% coupon rate on a three-year term to allow small investors buy bonds with as little as Kshs.3,000.

It is also important to note that government securities offer the best returns (ranging from 9 to 13.4%) on investment when compared to other asset classes. The securities can be sold or bought from the secondary market at the NSE.

N.B. Follow this online link:

https://nation.africa/kenya/life-and-style/saturday-magazine/your-step-by-step-guide-of-buying-and-making-money-from-bonds-3713824