DURING the just-ended 53rd Zambia International Trade Fair in Ndola, I had an opportunity to visit the Bank of Zambia (BoZ) stand.
I must admit my visit to the stand was worthwhile as it was enlightening.
One of the BoZ personnel from the financial market section took me and other visitors through the opportunities available for business institutions and the public at large to invest in government securities.
Government securities, which are instruments of debt issued by Government through the Central Bank, allow individuals and business entities to lend money to Government through treasury bills or government bonds at an interest.
Government is obliged to pay the holder of the treasury bill or government bond a fixed sum of money on the maturity date of the instrument.
While I had an idea that treasury bills are short term and government bonds long term, it was interesting to learn that the two debt instruments also differ in the way they are bought and how interest is paid.
Treasury bills, for instance, are always bought at a price less than the face value and on maturity date, Government pays the holder of a treasury bill an amount of money equal to the face value. The interest earned is the difference between the price one pays to buy the security and the face value received on maturity date.
On the other hand, government bonds can be bought at prices that are either less, equal or more than their face value and Government pays a fixed rate of interest, known as the coupon, every six months as well as the face value on the maturity date.
There are two options on which government securities are auctioned – competitive and non-competitive basis.
On the competitive basis, one competes with other investors to lend money to Government by specifying an interest rate and the face value of securities one wishes to purchase. The Bank of Zambia then ranks all bidders and allots securities and preference is given to investors with lowest rates.
Those who opt for the non-competitive category cannot specify an interest rate and should be willing to be given an interest rate computed based on results of the competitive auction.
While in the minds of many it may be perceived that to invest in government securities one needs huge sums of money, I was astounded and pleasantly so, that one can invest as low as K1,000 in the non-competitive category while the competitive category requires a minimum of K30,000.
Government securities also offer various options for the investment time frame.
Treasury bills, for instance, have four maturity periods – 91 days, 182 days, 273 days and 364 days while government bonds have six options of two, three, five, seven, 10 and 15 years.
It is up to individuals or business entities to choose their preferred time frame for investment.
To invest in government securities, one needs to understand when or how often auctions are conducted. For treasury bills, auctions are conducted fortnightly on Thursdays while government bond auctions take place every other month on Fridays starting with February, which means the next auction will be in August.
Apart from the Bank of Zambia website, all upcoming auctions are advertised in the daily newspapers every Wednesday. While individual bidders are informed of how their bids fared, BoZ also publishes summary notices and results of the whole government securities auction in daily newspapers every Monday after the auction.
To purchase any security, one needs to register with the Bank of Zambia by providing personal details on the Central Securities Depository (CSD) application form, which can be obtained from the BoZ offices or downloaded from the bank’s website. Thereafter, one can submit a bid for the security they wish to purchase.
Alternatively, individuals can submit applications through their respective commercial banks or by applying for Virtual Private Network connectivity at the Bank of Zambia at a fee.
There are many benefits of investing in government securities.
Government securities offer a high degree of security on investment; this is because timely payment of interest and principal at maturity on government securities is guaranteed.
Since most government securities cannot be called or redeemed before their final stated maturity date, an investor can lock in an interest rate for the full term of security. This means despite any negative trends in the financial markets, the interest rates agreed upon stand.
Government securities also offer some flexibility as they are in liquidity form and are therefore transferable.
One can also use government securities as collateral to obtain a loan from a commercial bank or any financial institution.
While government securities provide a good opportunity for many Zambians out there, the levels of literacy on such financial services are low.
There are so many Zambians investing their hard-earned money in more risky businesses because they are ignorant of secure investment opportunities which Government securities provide.
On the other hand, Zambians need to transform their mindsets from that of consumption to investment, if this country is to develop.
And government securities provide that golden opportunity.
The author is Zambia Daily Mail editorials editor.
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