The power of compounding M-Akiba Bond interest
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
17 November 2019
Joseph Maingi is
wondering how much extra he can earn if he re-invested the interest he
received from M-Akiba recently. He writes: “Do you know when they will
re-open the M-Akiba sales? I invested Sh1,024,700 in May and was
allotted one million shillings bond. That seemed like a bad deal but I
was happy to get Sh50,000 dividend (sic) in September.”
He continues: “This
covered the Sh24,700 extra that I had paid and still left me with
Sh25,300 to play with. To be honest, I have never been paid this much
after such a short time of investing in my life”
“I would like to
re-invest the entire Sh50,000 in the next opening of the bond. So, do
you know when it will happen?”
Congratulations,
Joseph! You have discovered the secret on investing. It is re-investing
earnings, also known as, compounding the returns.
Now, my answer to
your specific question is that I don’t know when The National Treasury
will re-open the M-Akiba Bond next. However, you do not have to wait for
a re-open to invest your money. You can do it tomorrow morning.
Simply call *889# on
your mobile phone, enter your password and select “Secondary Trading”.
Follow the instruction and enter the amount of bond you wish to invest.
I had explained how
the M-Akiba Bond is priced in secondary trading in my article of 16th
April 2017, but it does no harm to repeat. The basic idea is that the
buyer must compensate the seller for the interest earned during the
period elapsed since the last payment.
The last interest was
paid on 9th September 2019. By tomorrow morning, 70 days will have
passed since that day. The question then is: if you invested Sh50,000
for 70 days and earning 10 per cent per year, how much will your return
be?
10 per cent of
Sh50,000 is Sh5,000. This is what you earn in 365 days; therefore, each
day, you get Sh5,000 divided by 365; that is, Sh13.70. So, in 70 days,
your total interest comes to Sh958.90.
Thus, tomorrow
morning, you will pay Sh50,958.90 for the Sh50,000 bond. But that’s not
all: the Central Depository and Settlements Corporation (CDSC) charges a
transaction fee of 0.335 percent of the total amount: that is another
Sh170.71. Altogether, the total cost comes to Sh51,129.61.
By paying this
amount, you will bring your total M-Akiba Bond to Sh1,050,000. Thus, on
the next interest payment date (9th March 2020), he will be
paid Sh52,500. I would recommend that you immediately re-invest this to
take your total bond holding to Sh1,1025,000.
That way you will
avoids loss of interest and only incur the 0.335 per cent transaction
fees (or Sh167.50). Doing this will bring your final interest payment on
7th September 2020 to Sh55,125.
Thus, the total of
the three interest payments will be Sh50,000 + Sh52,500 + Sh55,125 =
Sh157,625; compared to Sh150,000 without re-investment. You will get an
extra Sh7,625 and incur an additional Sh1,129 + Sh167 = Sh1,296.
You will be Sh6,329
better off for doing almost nothing extra! A clear demonstration of the
power of compounding.
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