Getting to grips with bonds

As Rwanda’s debt market grows, we are seeing additional products being issued to investors. Most of these are government supported products. The three Treasury bonds and the municipal bond which is to be issued by Kigali city are the best example. The two Treasury bonds have interest rate of 8 per cent and mature in two years time, another Treasury bond has maturity period of three years but with a slightly higher interest rate of 8.5 per cent. The only none government bond is the Commercial Bank of Rwanda (BCR) bond which has interest rate of 9 per cent per annum. The difference between the BCR bond and the treasury bonds is very clear in terms of interest, maturity and the issuers. But the difference in terms of risk might not be a straightforward one for every investor to identify. The main risk is opportunity cost. Since government securities offer a very low risk, the interest rate is also lower than the ones offered by private entities. However, this will also depend on the investor’s habit. As a general rule, to earn the higher returns, you have to take greater risk. The least risky investments also have the lowest returns. A risk taking investor therefore will prefer high yield with high risk to low risk with low yield whereas a risk averse investor goes for less risk with low returns on investment. The other issue investors must be aware of is interest rates and inflation. The higher the interest rates, the lower the bond price. High inflation also erodes the value of money. If interest rates are high, prices for bonds are high while low interest rates mean high bond prices. It therefore calls for monitoring both economic and market changes since these will affect the level and value of ones investments. When you buy corporate bonds or Treasury bonds, you are investing your money that will be used to expand or enhance the institution that issued the bond. This requires you as a rational investor to make sure that the kind of projects the institution in question is undertaking are profitable. You need therefore to put into consideration the kind of investment you are undertaking and the risk-return factors need critical analysis. Contact: gahamanyi1@gmail.com