Investment Options: Investing in Government securities

Many of us are looking for some way to grow our money. Some are thinking of Businesses but may not be business minded or do not know which one to undertake or others keeping their money idle in Banks with Little interest earned. Today, I would love to introduce you and simplify what are known as Government Securities (Bonds and Treasury bills). This is going to be a question and answer simplification.

WHAT ARE GOVERNMENT SECURITIES?

These are debt instruments issued by the Government of Zambia through the Bank of Zambia. Hmmm confusing right? This simply means that the government is borrowing money from you, yes you. So you lend the government your money and then they pay back with benefits (interest).

SO IN WHAT FORM CAN I LEND THE GOVERNMENT MY MONEY?

There are mainly two debt instruments used namely the Treasury bills and Government Bonds. Treasury bills are known as short term debt instruments and are used when the government is borrowing money for one year or less. So if you want to lend your money for less than a year (91 Days, 182 days, 273 days and 364 days) treasury bills are used. Bonds on the other hand are long term debt instruments and are used when the government is borrowing money for a period exceeding one year and have six maturity periods namely 2 years, 3 Years, 5 years, 7 years, 10 years and 15 years.

TELL ME ABOUT TREASURY BILLS AND BONDS, HOW DO I EVEN BENEFIT?

Treasury bills are always bought at a price less than the actual value of the instrument and the interest is actually the difference between the actual value of the instrument and the price you buy it at. Example, you want you purchase a K1000 worth Treasury bill for 3 months. The selling price of the Bill could be let’s say K880. On the maturity day of the Bill, you will be paid a K1000 and that implies the profit gained is K120 (K1000-K880). So under a Treasury bill, the interest is the profit you make.

Government Bonds can be bought at a price less than, equal or more than the value of the Bond. The government pays a fixed rate of interest (called the coupon) every six months and then the value of the Bond on the Maturity date. So here, there is an interest on the value of the Bond and the Principal amount is paid at the end of the deal (At maturity).

BUT HOW DOES THE GOVERNMENT BORROW FROM ME?

Like said earlier, the Bank of Zambia issues these instruments on behalf of the government. There are basically two methods used. The instruments are sold at auctions on a competitive basis and non-competitive basis.

Competitive basis means you compete with other potential investors to lend money by specifying the interest and the value of the instrument you want. This means that you tell the Bank of Zambia that am willing to lend the government with this amount of money and I want this interest for my money. Of course, the Bank is likely to go for the lowest bidder and so you have to be tactical as you bid, just like any other auction you may think about.

Non-competitive basis is one where you do not specify the interest rate but you are willing to be allocated the securities at an interest rate based on the results of the competitive auction. This means the fate of your interest will be determined by those competing. For you, you wait for bidders to compete and then purchase the securities at the agreed price and Interest.

WHO IS ELIGIBLE TO PURCHASE THESE SECURITIES?

There are no restrictions to eligibility. Individuals, foreign entities, Business firms and institutions are all eligible to purchase these securities. As long as you have more than the minimum money required to invest, you are eligible.

BUT HOW MUCH DO I NEED TO HAVE?

For competitive purchases, the minimum amount of Money is currently K30, 000 for both Treasury bill and Bonds. As for the maximum amount, it is contained in the auction agreement.

For non-Competitive basis, the Minimum amount of money needed is a K1000 and maximum amount of not more than K29, 000. This means that as long you have at least a K1000, you can invest in Government Securities.

Lastly, what are the benefits of investing in Government securities?

• Collateral – Government securities can be pledged as collateral for a loan and accepted by all financial institutions

• Paperless – The records are stored and processed electronically

• Interest is certain – Usually governments do not default. You are assured of receiving your due when it matures.

Be wise, make your money make more money for you. You may start at a snail’s pace but the distance you’ll soon cover to achieve your life time goals will be amusing and soar as high as an eagle. Just give Government Securities a try.

We will be Happy to answer any questions you may have. info@zambezicapital.com