Frequently Asked Questions About Treasury Bonds

Treasury bonds are an investment instrument offered by the Central Bank. They are amongst the most stable investments one can make. 

However, how do you invest in Treasury bonds? Let’s dig deeper to find out.

What is a Treasury Bond?

A Treasury bond is a bond issued by the government. A bond is an investment instrument where the bond issuer borrows money from the bond buyer and pays them interest within an agreed period. The principal is paid back when the bond matures at the end of the borrowing period.

The Treasury takes advantage of bonds to raise finances for government operations and projects. Hence, a Treasury bond is a secure medium to long-term investment, where the government pays you interest every six months throughout the bond's maturity.

Treasury auctions these bonds every month. However, they issue different bonds throughout the year. 

There are three types of bonds.

• Fixed coupon bond - A fixed coupon bond means that the interest paid is locked at the beginning and will not change within the bond's lifetime. Therefore, the semiannual payments for the bond will remain the same for the lifetime of the bend.
• Infrastructure bonds - These are bonds issued by the government for specific infrastructural projects. Returns from infrastructure bonds are tax-exempt; hence, they attract many investors. 
• Zero coupon bond - These are issued for a short period. They do not have interest payments and are sold at a discount similar to Treasury bills. 

Most Treasury bonds are fixed bonds, making Treasury bonds a predictable, long-term source of income.

How Much Do You Need to Invest in Treasury Bonds?

You need a minimum of Ksh50,000 to invest in a Treasury bond. There is no cap on how much you can invest, though. That will depend on the bond the government is issuing and how much they want to raise.

What Is the Maturity Period of Treasury Bonds?

The maturity period for Treasury bonds can vary from one year to 30 years. The government issues many types of bonds that vary in their maturity period. As an investor, you can find the bonds with a maturity period that suits your liking. 

Are Treasury Bonds Risk-Free?

Treasury bonds are not risk-free. However, they are considered lower risk because the government's likelihood of default is lower than that of other businesses with a higher risk of failure. 

This is not to say that governments do not default; they do. However, the risk is low but not zero.

How Is the Interest on Treasury Bonds Paid?

The interest on Treasury bonds is paid biannually into the commercial bank account of the buyer as indicated in their Central Depository System (CDS) account. These payments are made for the lifetime of the bond. The last interest payment is made during the maturing of the bond, where the principal amount is also deposited into the same commercial bank account.

However, as an investor, you might want to roll over your principal to another bond. To roll over, you have to submit an application instructing the rollover to the Central Bank before the closure period for that bond. 

Can Treasury Bonds Be Sold Before Maturity?

Yes, you can sell your Treasury bonds before maturity. The first option to trade your Treasury bond is through the Nairobi Stock Exchange (NSE) secondary market. Treasury bonds can also be used as collateral when accessing credit facilities in financial institutions. The bond ownership is transferrable so long as the recipient has a CDS account.

If you fail to secure a buyer in the secondary market, the Central Bank can buy back the bonds at a punitive rate. The punitive rate discourages investors from selling back their bonds before maturity. The Central Bank buys back the bonds through a rediscounting process. 

To access the rediscounting fund, you need a letter from the NSE, a CDS statement, a copy of an identification document,  a pay-in slip, and a certificate of incorporation if you are a company.

How Are Treasury Bond Interest Rates Determined?

Investors submit their bids with the interest they would like to earn. The CBK takes all bids, averages the interest rate from all the bids, and analyses if the average bid is reasonable. They then settle on a competitive interest rate and only accept investors willing to lend at that rate.

Are Treasury Bond Interest Payments Taxable?

Yes, they are taxable. You must pay a 15% withholding tax for Treasury bonds whose tenors range between one and nine years and a 10% withholding tax for tenors above ten years. The withholding tax is charged on both the discount and the interest payments.

However, there might be tax exemptions. In this case, a tax exemption certificate has to be provided. In addition, infrastructure bonds are tax-exempt, so you will not pay any taxes on an infrastructure bond.

Can Treasury Bonds Be Used as Collateral?

Yes. Treasury bonds can be used as collateral. In case of default, your bonds get transferred from your CDS account to your creditor’s.

Can I Buy Treasury Bonds Directly From the Government?

Yes. You can invest directly with the Central Bank if you have a local commercial bank account. Otherwise, you can also invest as a nominee of a commercial bank or an investment bank in Kenya. You should invest through a local commercial bank directly to avoid being charged extra fees.

How Does Inflation Affect Treasury Bonds?

Inflation affects Treasury bonds in several ways. To start with, inflation is the reduction in purchasing power. Therefore, the returns you earn in an inflationary economy lose value. 

For example, if you locked in a bond five years ago at a 12% return rate and inflation has grown by 6%, adjusting for inflation, your return is more like a 6% return on your bond investment. 

On the other hand, the interest rate rises whenever inflation is growing because investors also adjust their risk. This makes the bond very expensive for the government. 

The bond becomes a risky investment with rising inflation because inflation indicates that the economy is not doing so well, and the higher the inflation, the higher the likelihood of a government default.

Wrapping Up

Treasury bonds are a worthy investment. They are lower risk but not zero risk. As an investor, you should do your due diligence before committing your resources to an investment. Nonetheless, investing in Treasury bonds is accessible to everyone. However, you have to be able to raise a minimum of Ksh50,000.