Fixed income securities

Ok, away from the depressing world of stocks, and on to the fixed income side. Odegle has given us quite some insight on the bonds world and I would love to join him in this discussion.

Fixed income securities can best be appreciated under three different concepts;

The duration (term)- long or short term,

The issuer – government or corporate.

The coupon disbursement – fixed or floating rate

Duration;

Fixed income securities are channels used by companies to borrow both short term funds – for recurring costs, and long term funds – for capital use. The securities duration implies the time it will take for the issuer to give back the principle to the lender. Short term falls below 1 year while long term goes above a year. This however differs in different countries.

Issuer

Fixed income securities can either be offered by the government in which case they are called Treasury bonds (Long-term) or treasury bills (short term). Bonds not offered by the government fall under corporate bonds, while short term non-government bonds are commercial papers. Names also differ in different regions. The treasury bill for example is called a gilt in the UK, and while treasury bills in Kenya are either 91 day long or 182 day long, in the UK, a gilt can have a term as long as two years.

Coupon Disbursement.

Coupon is the interest rate earned on bonds, and this can either be a fixed rate, where the interest rate quoted at offer point holds to maturity, or floating, where the interest rate changes with the changing environment. The floating rate is usually pegged to certain indicative rate. In Kenya, floating rate bonds are pegged to the 91 day treasury bill.

Interest is usually paid at different intervals, with most of the Kenyan bond coupons being under a semi-annual schedule, while other options such as quarterly or annual coupon payment being found in other countries around the world.

Treasury bills do not attract an interest parse but instead are discounted at offer, implying, the investor pays less but redeems the whole offered amount at maturity. This then translates as the interest to the investor. Most 1 year bonds offered by the government are zero coupon bonds and are also discounted like the Treasury bill.

Treasury bonds in Kenya are offered monthly while treasury bills are offered weekly. An auction is done every Thursday evening and the results announced on Friday.

While the treasury bonds market is not as developed as in other markets, they provide a good investment channel for risk averse guys, and also an escape haven for bad times on the equities market. The oversubscription that has been cited on the bills and bonds market over the last three months might be an indicator of the equity to fixed income funds flight.

Wow!! Quite a mouth full!