You have a friend, called Otieno who needs a loan for his butchery. You don’t have time yourself to run that kind business but you believe there is opportunity in the meat industry and figure you might as well benefit in some way from the returns of this business. So you lend Otieno Kes 100,000 payable in three years which he will use to refurbish his butchery. However you can’t lend Otieno Kes 100,000, wait three years and only get back Kes 100,000. That would be unfair to you because you could have done something else with the money i.e. there is an opportunity cost to lending Otieno the money. So Otieno agrees to pay you interest of 10% p.a. to compensate you for this opportunity cost. Because of the nature of how money goes in and out of his business he can’t pay you every month. At the same time it is not fair on you to have to wait till the end of the year or end of three years to get your return. Otieno therefore agrees to pay you interest every six months or semi- annually. In a year you would be earning Kes 10,000 (10% of Kes 100,000). If he is paying interest every six months that will translate to you earning Kes 5,000 every half year for three years. The last payment at the end of three years will be the final interest of Kes 5,000 plus you will get back the initial capital invested of Kes 100,000; which is a total of Kes 105,000.trae

This week, my class has been learning about Treasury Bonds. From comments in the class, this is an area that a lot of people would like to invest in it but think it is very complicated. I agree the way information is displayed about Bonds, is not very user friendly. However our scenario above with Otieno is exactly how most bonds work only that Otieno is the government. The government borrows from us to finance certain expenditures like infrastructure, development etc. The loan that we give the government is referred to as a Bond. Depending on the intended use of the funds, bonds can be issued from 1 year to 30 years. This is known as the tenor of the bond. The interest rate a bond will earn is referred to as the coupon. If you invested in a three year bond with a coupon rate of 10%, the payments to you will be paid semi – annually in the exact same way as when you invested in Otieno’s business. Now Otieno can decide to raise Kes 1,000,000 from his business from various investors. Some will give 100,000; others 50,000; and others 200,000 depending on their ability at the time. All Otieno is interested in is getting to a total amount of Kes 1 million. Whether you put in Kes 50,000 or Kes 200,000 you will all earn an interest rate of 10% p.a. on your money. In the same way the government can opt to raise even Kes 15 billion from various investors but the minimum they will take from any one investor is actually Kes 50,000. So as long as you have Kes 50,000 you can invest in a bond. Bonds, contrary to popular belief are not only for the wealthy or for institutions. If you put in Kes 50,000 and someone else Kes 50 million you will earn pretty much the same coupon (or interest rate) on your money. Many people look at the Kes 15 billion the government is trying to raise and instantly think their money is too little.

To invest in a Bond you firstly need to open an account with the Central Bank of Kenya (referred to as CDS account) and then fill in a separate application form for whichever bond you wish to buy. The government advertises any bond it is issuing in the daily papers as well as on the Central Bank website. Bonds are safe investments so your rationale around bonds would not be to double your money overnight. If you want to grow the value of your funds, look elsewhere. It is a lower risk investment hence will have lower returns. However if it was money you were going to keep in cash or looking for a secure place to invest, this is definitely worth considering. The last two year bond issued in February is earning a coupon of 12.8%. Your Kes 50,000 sitting in a savings account would probably not earn the same rate of return. Bonds are also a good way of securing a source of income and can come in handy when planning for Retirement. Many people who want to keep a portion of their retirement portfolio safe while earning an income to help meet with everyday expenses have opted to invest in Bonds. If you had built up a retirement portfolio of Kes 10 million, this same bond would earn you Kes 1.28 million per year which is translates to Kes 100,000 per month. That could be a large portion of what you actually need to live off. The Kes 10,000,000 would remain intact while you just live off the income being generated. After the class on this subject one of the students said he had learned not to discount anything because it looks complicated. I also have grievances as well with how they are advertised but bond investments are for you and me just as much as “rich” people.

Waceke Nduati

The author runs a program on personal financial management. Find her at waceke@centonomy.com or on twitter @centonomy.

Question and Answer

I have several loans and would like to consolidate them into one loan and stretch the repayment. Is that advisable?

If you are currently able to meet your obligations do not consolidate with the aim of stretching the repayment. You may be left with more money in the bank to spend but you will pay more interest over time. Debt consolidation should only be used when someone can actually not meet their obligations. If it used simply to make life easier, people actually end up getting into more debt or go back to bad spending habits. Pay your debts down faster so you can move on and purse other goals you may have.

I was very encouraged to read in your article that one can do share investments with as little as Kes 6,000 ( being a cup of coffee) per month. I am a student and I am able to save this through a part time photocopying job. What shares should one be looking at?

Congratulations first of all for taking advantage of your spare time to work and earn extra money. This discipline will take you a long way in years to come. You are young and hence should be looking to grow the value of your money. You will need to do more research but look for companies that are in sectors that are set to grow given the economy of the country. Examples would be banking, construction, IT etc. That will help narrow your options and then you can get research on individual shares from your stock broker.

Waceke Nduati

Email your questions or comments to Waceke her at waceke@centonomy.com| twitter @centonomy