How to trade
bonds at the stock exchange
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
04 October 2009
If you invested in the KenGen Infrastructure Bond and you want to get
your money back before the maturity date (October 2019), you will have
to trade it at the Nairobi Stock Exchange. Here are some basics that you
will need to know before you engage in this trade.
First of all, unlike shares, bonds are not subdivided into units. Thus
you cannot place an order for, say, 100,000 KenGen bonds! Instead, you
instruct the broker to get you “a Bond of Sh100,000 face value”. Notice
that, regardless of the value, it still remains one bond…in financial
jargon, it is called a note in the bond.
The broker will then ask you how much you are willing to pay for the
Sh100,000 (note in the) bond. Your answer to that question will depend
on several things, but the primary determinant will be the number of
days remaining till the next interest payment date.
Quotes are normally given in shillings per
Sh100. For example, you might be willing to pay Sh105 for every Sh100 of
face value. Brokers sometimes refer to that as a price of 105 percent,
but that convention confuses some investors, especially those from
Now; even though there is no rule restricting the face values of bonds
that can be traded at the Stock Exchange, a tradition has been
established where deals are only transacted in multiples of Sh50,000.
However, with the coming of the KenGen bond, this practice will have to
be abandoned.
The reason is that, come April 2013 when the first principal instalment
is paid out, many retail investors will be left holding awkward face
values of the bond. Those who purchase Sh100,000 worth in the public
offer will be left with a Sh93,750 bond.
If the present tradition continues, these people will only be able to
liquidate part of their holding and they will be left holding an
untradeable Sh43,750 bond. I hope the brokers are aware of this
eventuality and they will relax the restriction in order to allow
retailers to participate fully in the trade.
As mentioned earlier, the price of a bond strongly depends on the date
on which it is traded. To illustrate, suppose you bought a Sh100,000
KenGen Infrastructure Bond during the public offer. It will begin
trading at the Stock Exchange on 9th November 2009 – seven days after
the issue date.
At 12.5 percent per year, your bond will have earned about Sh240 in the
period from the issue date to the first trading day. This is easy to
calculate: divide the 12.5 percent by 365 days, then multiply the result
by seven, and finally multiply that by Sh100,000.
Thus the fair price (and I emphasise the word “fair”) you can ask for is
the one that gives you back the interest earned by the bond as at that
date. Thus you may fairly expect to get about Sh100,240 for your
Sh100,000 bond. In other words, Sh100.24 per Sh100.
Whether you can get some one willing to pay that much is different story
altogether. It will depend on the demand in the market and also on how
desperately you want your money back.
The important thing to note is that the fair selling price will increase
by about Sh0.24 per Sh100 every week thereafter. For example, on 16th
November, two weeks from the issue date, it will be Sh100.48 and so on.
What if you missed the public offer and you wanted to buy from the Stock
Exchange; what would be the fair price to pay? I will explain how to get
it next week.
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