What is a bond?

A bond is a debt. A Treasury bond is a government debt. Treasury bonds and Treasury bills are debt instruments or securities issued by the Central Bank on behalf of the Government of the Republic of Rwanda. The purpose of issuing the Treasury bonds is to finance or promote public investments or projects. Bonds issued by companies are referred to as corporate bonds.

Municipalities or local government debt issues are called municipal bonds. Bonds usually carry an interest income called a coupon. Interest income or coupon is usually paid every six months. Treasury bonds are long dated debt instruments with maturities of more than one year.

The most common and familiar instruments in our money market have been Treasury bills which have maturities of between threes months (91 days) and 12 months (six months or one year). The key feature of Treasury bills is that they do not pay interest in between the life of the debt. Interest on Treasury bills is paid together with the principal amount at maturity. In fact, Treasury bills can be referred to as zero interest or zero coupon bonds. Treasury bills are government debt instruments that are issued at discount and the buyers or lenders usually receive a lump sum of interest at the end of the period or at the maturity date. When an investor purchases or invests in a 91 day Treasury bill, the investor pays for the bill at a lower rate than the face value of the Treasury bill and may hold the bill to maturity date.

Treasury bonds will usually have a coupon rate (the rate of interest) of six months and the Treasury bonds holders (investors) are usually paid an interest every six months until the maturity date when they are paid the last interest portion together with the full principal amount initially invested. For example, the first Treasury bond issued by the Government of Rwanda on January 17, 2008, was a two year bond with an eight per cent coupon and will have four interest payment dates as specified in the published prospectise, as 18/07/2008, 16/01/2009, 17/07/2009 and 15/01/2009.

Treasury bonds also have a par or nominal value usually rounded to Frw 100 per unit of the bond. One bond issue could have several units of bonds each denominated at par value. The presence of par value per bond is a very important feature in a bond as it enables the bond to be subdivided into several units and they are convenient to transact on the secondary market without having to sell a whole bond especially when the intention was to sell only a part of the bond.

The divisibility of a bond into several units enhances the ability of the bonds to be traded in the secondary market. A single bondholder can sell a bond to several people or investors in the secondary market.

For example, if I invest (bought) Frw1m in a Treasury bond and the par nominal value per unit of the bond is Frw100, I could sell the bond in the secondary market in ten lots or units to ten different investors as each unit of my bond will be having a face value of Frw1m. This feature of divisibility encourages investors to buy Treasury bonds since they are perceived to be more liquid; easier to cash.

Money market vs capital markets

It is also important to note that Treasury bonds are mainly traded or transacted in the capital market while Treasury bills are transacted in the money market. The capital market is for long dated instruments while the money market is for short dated instruments or securities. A Treasury bond holder or an investor is able to sell his or her bond in smaller units or over a number of days until he or she completes selling their bonds as desired.

In both the money and capital markets, it is possible to sell any security before its maturity date. One can sell a Treasury bill in the money market on any day before its maturity. However, to sell a Treasury bill an investor must use their bankers, stockbrokers or a discount house to fetch a buyer for their bill. Equally a holder of a Treasury bond will be any to sell their investment on any day during the life of the bond depending on liquidity conditions prevailing in the capital market. Secondary market prices of Treasury bonds are easily available since they are listed on the Over the Counter (OTC) market and published by the stock market.

Market prices

Although Treasury bonds have a coupon (interest rate) and a par or nominal value, the price at which they are traded in the secondary market is in most cases different and determined by the market forces in place at the time of the transaction in the market. These factors are both fundamental and technical. Fundamental factors refer to the economic conditions and these include inflation, interest rates prevailing, the fiscal considerations, employment and political environment. Technical factors may refer to the day to day forces of supply and demand in the money and capital markets.