In Kenya there exist two types of government securities; bills and bonds. These are both debt instruments but they vary in certain aspects.

A Treasury Bill is a short term debt obligation issued by the government. In Kenya there are three types:  the 91 day T-Bill, 182 day T-Bill and the 364 day T-Bill. They are sold at a discounted price to reflect investor’s return and redeemed at face (par) value; which means that they do not pay fixed interest payments like conventional bonds but rather the appreciation of the bond provides the return to the holder. For example, for every 95 shillings you invest you receive 100 shillings upon expiry of the Bill’s term.

A Treasury Bond on the other hand is an instrument whereby an investor loans money to the government, which borrows the funds for a defined period of time at a fixed interest rate to finance a variety of projects and activities. They pay either fixed or floating interest payments during the term of the bond.

Treasury Bonds and Bills are good ways of investing as they are virtually risk-free and therefore redemption is guaranteed.

How exactly does someone go about buying one?

The process itself

To invest in a government security one must have an active and updated CDS account at the CBK. The CDS (Central Depository System) is a computer system that facilitates the holdings of shares and other securities in electronic accounts, opened by investors and manages the process of transferring the securities traded at the CBK.

We will consider the case of investing in a Treasury Bill as Treasury Bonds are only available when advertised not on a frequent basis as is the case of Treasury Bills.

The 91 day and the 182 day T-Bills are sold weekly while the 364 day T-Bill is sold monthly. The offer being made by the CBK eg inviting members of the public to submit bids of Ksh 4 billion is usually advertised in the newspapers the week before the securities go on sale.

Investors must correctly and appropriately complete Treasury Bills application form available at the Central Bank of Kenya head office Nairobi or any of its branches in Eldoret, Kisumu and Mombasa or currency centres in Meru, Nyeri and Nakuru. The duly completed application form must then be submitted to Central Bank (or branches) on or before 2.00pm on Thursdays for 91-days and on Wednesdays for the 182- and 364-days papers.

Investors may place their application either as competitive or non-competitive (average) bids. Competitive bidders MUST indicate the desired price/yield and usually monitor and understand the movements in interest rates and market conditions. However, such bids may either be accepted or rejected depending on interest rates and liquidity levels. Non-competitive bidders on the other hand only indicate ‘Average’ or ‘Non-Competitive’ in the place of offer price per Ksh 100 in the application forms. Since this category is a price-taker of market outcome (successful weighted average rate/price), their placement is guaranteed. However, maximum amount one can invest per CDS account per issue/tenor is Ksh 20,000,000.

 Since it’s a bid what amount does one pay the CBK?

The Auction Management Committee (AMC) meets every Thursday at 4.00pm to conduct the auction of the 91-days paper and on Wednesday for the 182-day and 364-day papers.  After considering all bids received, competitive and non-competitive, AMC arrives at a cut-off rate based on among other considerations, amounts advertised.

The successful weighted average rate derived from competitive bids is applied to all non-competitive bids and is published with the results in the daily newspapers. Investors then call or visit the Central Bank or its branches or currency centres a day after the auction date to know how much to pay for individual successful bids.

What happens upon maturity of the security?

The CBK electronically deposits the face value of maturing securities directly to the investor’s commercial bank account on the date of maturity. The investor’s CDS account is debited by the same value of the security and statements are sent to the investor showing their new position.