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