Hot to trade M-Akiba bond in secondary market
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
16 April 2017
A crucial piece of
information was omitted from the prospectus and the terms and conditions
for the newly launched M-Akiba treasury bond. It was only on Tuesday,
April 11, 2017 (four days after the closing of the primary sales) that
the public became aware that there is going to be a contracted bank to
buy any M-Akiba bonds that cannot get buyers at the Nairobi Securities
Exchange. In effect, any bond holder wishing to cash their investment is
guaranteed a buyer.
Without that
information, I was of the view that it would be difficult for investors
to cash their M-Akiba bonds. Well; now I know that it will be easy. The
question that remains is: what would be the best price?
When trading bonds in
the secondary market, it important to detach two things: the price of
the bond and the interest it has earned. If you bought the M-Akiba and
you want to sell it before the first interest payment date, you surely
deserve to be given the earnings it has made as of the selling date,
don’t you?
For that reason, bond
brokers talk about clean prices and dirty prices. The clean price is
that of the bond alone and the dirt one is when the accrued interest is
added.
Suppose you have a
Sh100,000 M-Akiba bond; you will be paid Sh5,000 on 9th
October 2017 – that is, after six months, or 181 days. Therefore, your
investment is earning Sh5,000 divided by 181 = Sh27.62 per day.
Thus, as of today, 16th
April 2017; you have held the bond for six day and you have earned
Sh165.75 in interest. Tomorrow, the total earnings will be Sh193.37.
If you decide to sell
it off tomorrow, the buyer must be prepared to refund you this Sh193.37
before you start negotiating price of the bond. The reason is that if
you sell it, the buyer will get the entire Sh5,000 interest come 9th
October 2017. What about you?
In this arrangement,
what you will be selling is the bond alone, not the interest earned so
far. The price of the bond will then be determined by the forces of
supply and demand. There is nothing to stop you from asking for a clean
price that is higher than the Sh100,000 that you invested. Conversely,
there is nothing to stop a buyer from offering you less than Sh100,000!
Still; there is the
small matter of trading commissions. Again this information is not spelt
out clearly in the prospectus or in the terms and conditions. I called
the M-Akiba office and was told that it is 0.535 per cent of the face
value of the traded bond and that this is charge on both the buyer and
the seller.
Thus, if you sell
your Sh100,000-bond at Sh100,000, you will get Sh99,465 plus the
Sh193.37 accrued interest. The total is Sh99,658.37. thus to make money,
you must sell it at Sh100,535 or more.
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