Understand the Infrastructure Bond IFB1/2022/18

Infrastructure Bonds are bonds/loans issued by the Government for the financing of a public infrastructure facility e.g road, hospital, or energy project. This bond will be used to fund the infrastructure projects in the 2021/2022 budget.

Duration of the new bond: 18 Years

The coupon is the return you get from investing in a bond. It’s the interest rate issuers promise to pay to bondholders until the bond matures. This is expressed as an annual percentage of the bond’s notional value. For this bond it is market-determined. This means the coupon rate will be determined by the prevailing market interest rates. The interest will be paid on a semi-annual basis that is it will be paid twice in a year. An example is, if you invest KES. 1,000,000 and the coupon rate 12% you will receive KES. 120,000 for the year but since it’s a semi-annual paying bond, you will get two equal payments of KES. 60,000 in June and December every year as published in the prospectus.

Bonds can be bought and sold in the “secondary market” after they are issued, so one is able to exit should they need to by selling their holding to someone else.

  • A bond’s price and yield determine its value in the secondary market. Obviously, a bond must have a price at which it can be bought, and a bond’s yield is the actual annual return an investor can expect if the bond is held to maturity. Yield is therefore based on the purchase price of the bond as well as the coupon.
  • The yield is what you expect to earn from your investment, expressed as an annual percentage. It takes the purchase price of the bond into account, along with its fixed-rate cash flows (Coupon) and the return of principal at maturity.
  • A bond’s price always moves in the opposite direction of its yield. The key to understanding this critical feature of the bond market is to recognize that a bond’s price reflects the value of the income that it provides through its regular coupon interest payments. When prevailing interest rates fall – notably, rates on government bonds – older bonds of all types become more valuable because they were sold in a higher interest rate environment and therefore have higher coupons. Investors holding older bonds can charge a “premium” to sell them in the secondary market. On the other hand, if interest rates rise, older bonds may become less valuable because their coupons are relatively low, and older bonds, therefore, trade at a “discount.”

How to Invest in the Bond

  1. Open a CDS Account with CBK Kenya: To open a CDS account, you need to hold a bank account with a Kenyan commercial bank. You can collect a mandate card from the Central Bank or any of its branches.
  2. Complete and Submit an Application Form: When you are ready to invest, you need to complete a Treasury bond application form. This includes information about the Treasury bond you want to purchase, like the issue number, the duration, and the face value amount you want to invest. It also includes information about yourself, including your name, telephone number, CDS account number, commercial bank account number, and whether the funds you are investing in are coming from a local or offshore source.
  3. Getting the Auction Results: The results from the auction are published, through Treasury Mobile Direct (TMD), Twitter, and in the statistics section of the CBK website. While investors will typically receive Treasury bonds in the amount they applied for, the Central Bank can issue bonds in a lower amount.
  4. Payment: The payment period for an auction typically closes on the following Monday at 2pm. Investors can submit their payments, in the amounts specified by the Central Bank, through cash or banker’s cheques for amounts under Kshs. 1 million.

NB: Successful applicants who fail to submit payments within the payment period can be barred from future investment in government securities.

Advantages of investing in a bond:

  • Capital preservation: Unlike equities, bonds should repay principal at a specified date, or maturity. This makes bonds appealing to investors who do not want to risk losing capital and to those who must meet a liability at a particular time in the future.
  • Income: Most bonds provide the investor with “fixed” income. On a set schedule, whether quarterly, twice a year or annually, the bond issuer sends the bondholder an interest payment, which can be spent or reinvested in other bonds. Stocks can also provide income through dividend payments, but dividends tend to be smaller than bond coupon payments, and companies make dividend payments at their discretion, while bond issuers are obligated to make coupon payments.
  • Capital appreciation: Bond prices can rise for several reasons, including a drop in interest rates and an improvement in the credit standing of the issuer. If a bond is held to maturity, any price gains over the life of the bond are not realized; instead, the bond’s price typically reverts to par (100) as it nears maturity and repayment of the principal. However, by selling bonds after they have risen in price – and before maturity – investors can realize price appreciation, also known as capital appreciation, on bonds.
  • Diversification: Including bonds in an investment portfolio can help diversify the portfolio. Many investors diversify among a wide variety of assets, from equities and bonds to commodities and alternative investments, in an effort to reduce the risk of low, or even negative, returns on their portfolios.
  • Potential hedge against an economic slowdown or deflation: Bonds can help protect investors against an economic slowdown for several reasons. The price of a bond depends on how much investors value the income the bond provides. Most bonds pay a fixed income that doesn’t change.

 

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