What are bonds and treasury bills? (A case study of operation in Uganda)

Government Securities are government debt papers issued to finance its expenditure and or regulate money supply. There are two types of Government securities of which these are Treasury Bonds and Treasury Bills.

What are Bonds?

A bond is a debt security under which the issuer (Bank of Uganda or a company) owes the holder a debt. Depending on the terms of the bond, the issuer is obliged to pay interest (coupons) at fixed intervals (semiannual or annual) and/or repay the debt (Face Value) at a later date termed the maturity period.

The Bond market in Uganda

Treasury bonds are long term financial instruments issued for a maturity period longer than one year to the investing public. The Investment Period for Treasury Bonds is long term tenors of: 2 years, 3 years, 5 years, 10 years and 15 years

Treasury Bills

The Treasury bills (T-bills) are bonds issued by BoU with short term maturities (less than one year). The Investment Period for Treasury Bills is short term tenors of: 3 months (91days), 6 months (182 days) and 1 year (364 days).

Who can invest in these securities?

Private companies, Commercial banks, Insurance companies, Government agencies, Pension funds, Individuals (of at least 18 year-old), Primary dealer banks and offshore investors through different brokerage firms like Crested Capital etc. banks like Housing Finance Bank, UBA, Equity Bank, ABSA among other financial institutions.

Why to invest in bond market?

Bonds offer a competitive rate of return compared to a savings account (15.58% for the 364 Days T-bill in the auction as at 04.02.2015). As it is a government security, it is almost risk free, and it can be easily and quickly sold on the secondary market. Both Treasury bills and Bonds are traded on the primary market for new issuances (i.e. the First hand market), and on the secondary market for existing bonds (Second hand bonds). Treasury bills auctions are held fortnightly (every two weeks) while Treasury bonds occur according to a timetable issued by the Bank of Uganda (BoU).

How to invest in a Bond market?

In order for you to invest in Government securities, first of all you have to open up a Shares Account (SCD) with any brokerage firms in the country for them to have information on you. Opening this account is free of charge and so is maintaining it. The requirements to open one of these include;

• Valid ID (Passport, Voter’s card, Driver’s License or any other form of Identification)
• 3 colored passport sized photos, then you’ll be required to fill in and sign forms availed to you at the brokerage office visited.

After you have opened a shares account, you’ll be required to sign an agreement with the brokerage firm you will have visited where you will authorize them to hold your government securities in their CDS Account which holds governments’ securities. Remember that the minimum amount required to invest in Government Securities is UGX 100,000

What are benefits of investing in Government securities?

• Good for long term savings like retirement and education

Because T-bonds are typically risk free investments, you might find them useful if you’re looking toward affording the best and complete education for your children or even a good life during retirement. In addition, they can help generate a steady stream of income through periodic interest payments.

• Safety for your savings

These are considered to have little or practically no risk attached to them (risk free investment). You will definitely get your principle and interest payments. You’re guaranteed a certain rate of return on your investment.

• No value loss

Treasury bonds are considered extremely safe investments — because the government backs your principal investment and interest payment.

• Returns are predictable over time

Unlike other turbulent investments, Tbills/bonds are known to remain relatively stable with predictable and certainty in payment of your returns.