TREASURY BILLS FOR DUMMIES

You are tired of earning 0.5% interest on your Savings Account,uninterested in all those mutual funds/unit trusts but need a place to keep your money."Treasury Bills !" (Short term paperless Government Borrowing issued through Central Bank for periods up to 1 year)pops into your head.Central Bank of Kenya (CBK) announced that you can buy Treasury Bills from Ksh 100,000 and multiples of Ksh 50,000 thereafter.

How do you start?
The first thing is to open a CDS account with at the CBK.Download the application forms off the CBK site then fill them in and return them to any of the CBK branches- Nairobi,Mombasa,Kisumu and Eldoret.

Before you invest there is the investing jargon that you need to understand such as:
TENOR- Length of time before a bill pays back the principal amount.For instance a Trasury Bill that pays back its principal in 91 days has a 91day tenor.

MATURITY DATE- Date on which the bill pays back the investor the principal invested and interest.

FACE VALUE- Full value of a treasury bill that is issued eg. if a Ksh 1 billion treasury bill is issued.Its face value is Ksh 1 billion.Face value may differ from what you pay in.If a bill is at discount you pay less than face value i.e. less than Ksh 1 million.a bill issued at PAR is paid for at full face value i.e. Ksh 1 million for Ksh 1 million.

Applying for your Treasuries
With your CDS account ready,you can apply for the treasury bills auctions on a weekly basis.
91 day and 182 day treasuries are issued alternately i.e if 91 day is auctioned this week , 182 day is done the following week.

Treasury Bills are sold at a discount- you pay for less than face value and on maturity you get what you put in plus interest .The two are equal to face value.
For example,CBK offers a Ksh 100,000, 364 day Treasury bill at 8% interest per annum at a discount.An investor would pay Ksh 92,593 and receive Ksh 7,408 interst on maturity after 1 year.His total return would be Ksh 100,000= Ksh 92,593+Ksh 7,408. (i have ignored taxes)

The FACE VALUE of the bill is Ksh 100,000, the discount is the interest of Ksh 7,408. All Government of Kenya treasury bills follow a simialr pricing format.

CBK has a bond price calculator on their website. Key in your required return,initial investment and get the expected returns and tax amount.Click on the hyperlink for the CBK treasury pricing Calculator.

Competitive or Non Competitive?
When applying you have an option of bidding competitive or non competitive.Competitive bidding means that you quote a rate to CBK.Unless,you are a financial proffessional-know a lot about interest rates and Yield curves - bid Non competitive(limit for non-competitive is Ksh 10 million).Because you may ask too high a rate an your bid may be rejected.Non-Competitive means that you will accept the average interest rate at that auction.

How it goes

Every week CBK will offer treasuries for auction via notices placed in the media and on their site.You must apply by Thursday 2pm weekly.The auction results come out on the next day -Friday on their site and the Daily Nation.Allocations are to be paid on the following Monday(known as the value date) to CBK by 2p.m.

On Maturity

CBK wires the principal and interest(Face Value) to your bank account unless you have used your CDS account as security for a loan.Then it's wired to the lender.Rollovers are allowed i.e. your proceeds are applied to the next treasury auction.

Small Investors

Small investors may find it easier to go through a money market or bond fund.The process for small amounts of money may be tedious and the interest rates not exciting.e.g. if you invested Ksh 100,000 in in the 182 day Treasury bill auction-1849 of 02/11/2009,payment would be Ksh 96,712.20 and interest Ksh 3,287.80 after tax for the period.

For amounts above Ksh 1 million (US$ 12,987) it makes sense.Because to get an attractive fixed rate at a locally based bank you must have at least Ksh 10 million (US$ 129,870).

I came across some more blog posts on bonds:

hatua.blogspot.com- Good post on bond pricing

Kenyankytoon-A beginner's introduction to bonds but with a US/Canadian flavour

OBSERVATIONS ON KENYA'S 2009/2010 BUDGET

The Finance Minister has impressive speech delivery. He kept the budget speech short, interesting and communicated with his audience within and outside the Parliament during the speech.
2009/2010 budget anticipates Government borrowing of Ksh 109 billion. Armchair economists have crowed about how the new borrowing will crowd out the private sector and raise interest rates.

I think NOT.Uhuru provided an expansionary budget and an expanded source of funds at the same time. How?

Firstly, he has provided AMMENDMENTS to the Retirement Benefits Authority (RBA) regulations to allow schemes below Ksh 100 million in size to invest entirely in Government Bonds and bills. New money into statutory schemes such as the new Civil Service Pension scheme, Local Authorities provident schemes and National Social Security Fund (NSSF) will be channeled into Government securities and infrastructure bonds.

Secondly, he maintained the current TAX RATES. In an environment of rising inflation constant tax rates allow Governments to increase their tax revenues without raising tax rates. For instance, if the price of a widget increases from Ksh 116 to Ksh 150.Value Added Tax payable to the Government would rise from Ksh 16 to Ksh 20.69 (assuming a VAT rate of 16% and a VAT inclusive sale price of Ksh 116).
Salaries are likely to be increased to mitigate the effects of higher living expenses. If your Gross pay rises from Ksh 20,000 to Ksh 25,000 your tax payments rise. The effect is more pronounced if your gross is above Ksh 40,000 because your marginal tax rate is 30%.

Thirdly, Kenya has a low CAPACITY to spend. It is unlikely that all the money set aside for the CDF and other Development projects will get spent. Hence, our deficit may be smaller than expected.

Links: 2009 Budget speech and Finance Bill 2009.

OPEN LETTER TO THE BUSINESS DAILY

14^th February,2009

Pesa tu

Pesa_tu@yahoo.com

Dear editor,

REF: Making the Business Daily a better read

congratulations on launching a new and unique business product. Business Daily provides us with a daily paper that gives us all the business and economic news in one package. It isn’t filled with details of the latest antics or fallouts at ODM or PNU.

Business Daily’s content quality is certainly higher than anything out of the rest of East Africa. Approaching but not next to Financial Mail (South Africa) and probably aiming for Financial Times quality. In order to make it a great paper, I have made the following suggestions and or observations.

1. CONTENT

The target audience for BD has access to Reuters and Bloomberg terminals. Therefore, any reprints from LA times, Reuters or Bloomberg were read a few hours before it was published in the paper. It is very disappointing to buy a paper and find that 40% of it is available for free on the internet (and on other people’s website)

Yes, I’m aware it is challenging to come up with fresh content daily. This can be solved by using your Africa network to deliver more Pan-African business stories. We can have Tanzanian, Zambian or Nigerian business stories as front-page.

How about a profile of African business titans? Do Kenyans know about Reginald Mengi or Gordon Wavamuno?

2. RELEVANCE

It is pointless to reprint Jeremy Clarkson’s motor review that appears on Sunday on The Times website, the following Friday. The target audience read it 5 days before. Plus, Clarkson’s’ cars are hardly on sale here (Kenya).His humor is hard to catch unless; you have an understanding of English snob jokes and sarcasm.

The better alternative would be to get the guys behind the Autozine magazine do a weekly column. Autozine tends to get the balance between auto porn (pictures of Lamborghinis, Ferraris etc) and practicability (reviews of ex Japan used cars that Kenyans buy).They had a review of the used 2001 Toyota Vitz Vs Mazda Demio Vs VW Polo. Cars that your readers can buy. Clarkson had a Ford Kuga review-how accessible is it for your readers?

3. Localise the online forums aka forget Facebook

Facebook may be great for connecting with old pals. I’m on it and love it. I don’t think I or most people would like to argue about a political or business issue on it. For that we go to Stockskenya.

Why not talk to Stockskenya and have a Business Daily tab to discuss the day’s articles. Of course, there are legal issues concerning this arrangement. For example, libel. Nobody will sue stockskenya for libeling them (they don’t seem rich) but you will because people think you have money.

I hope the observations are useful.

Your subscriber

Pesa Tu

MADOFF LIST,KENYA and SOUTH AFRICA


I saw bankelele's post that a Kenyan resident was on the Madoff list.In case you got released from Kamiti yesterday, Bernard Madoff was an American who ran a giant ponzi scheme.Think of it as a complicated DECI-pyramid scheme for the rich and famous.

The Times has the client list on its site.Looking through it the only african residents are the Kenyan with the Mweiga address and a South African.The fact that we are the only Africans on this list probably indicates our higher level of financial sophistication relative to other African countries.
I wonder how much of the money that some of our country men/women have stashed abroad has been consumed by the recent financial crisis.

CLICK HERE for the madoff list

CHARITY PORN????

I must confess that when the independence fathers of Kenya said that we would fight poverty,ignorance and disease, it always seemed that those were obvious problems that would be solved. The recent fire disaster at Molo was a volatile mix of petrol,ignorance and poverty.People were ignorant bout their safety and poverty drove them to take the risk of collecting and selling the fuel. Ask yourself if we can take the risk of collecting highly flammable petrol from a accident site,what won't we do for a few coins(i'm thinking unprotected sex in these days of HIV).I found out what we can be done for on this blog.

We Kenyans can do anything and everything for money(blame poverty).We have helped start a new industry-CHARITY PORN.This is how it works.An adult film co. from the West ships in Porn.. sorry adult entertainment actresses in to the country.The actresses have sex with other foreign actors/actresses at local settings.Part of the proceeds from the very explicit films are donated to the local community and charities.

Natural High-Japanese adult entertainment company flew in a couple of its performers and shot a DVD for its Naked Continent series here.The producer has donated 1 million Yen to help a charity.Every 1000 Yen from every DVD sale. Here are more pictures from Sociological Images