What is the process of opening a CDS Account and trading in treasury bonds? Let’s begin by looking at what treasury bonds are.
Treasury bonds are secure, predictable medium-to-long-term investments that offer interest payments after every six months throughout the tenor or maturity period.
According to Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money, bonds are issued monthly and sold in minimum bundles of Sh. 50,000 except for infrastructure bonds that go for at least Sh. 100,000. Chacha says that bonds come in three forms. These include:
1). Fixed coupon bonds: These offer regular interest which you receive every six months.
2). Infrastructure bonds: These are tax exempt and are aimed at funding government projects in periods of say 10 or 20 years. They are very attractive because they’re tax-free.
3). Zero coupon: These are issued for a short period of time and are sold at a discount, but have no interest payments.
1). The process
You will need to open a Central Depository Settlement (CDS) account with the Central Bank of Kenya. Opening this account is free. This can be done by visiting CBK or any of its branches which include Nairobi, Mombasa, Kisumu, Eldoret, Nyeri, Meru, Kisii and Nakuru Currency Centres.
“You will fill an application form called a mandate card in neat block letters, and provide personal information such as details about your contact,” says Chacha.
You will also need to have a bank account when opening your CDS account.
“You must also complete the CDS account signature specimen, get two signatories from your bank to sign the mandate card to verify the information you have provided. You will then need to submit a coloured passport sized photo of yourself, certified and stamped by a representative from your bank,” says Chacha.
In addition to this, you will be required to fill out the email indemnity agreement which requires a witness and submit a clear copy of KRA PIN, your national ID, passport or alien certificate.
Robert Ochieng’ the founder of investment firm Abojani Investments, may also be required to register for CBK-Treasury Mobile Direct (TMD).
This will allow you to access specific mobile services on government securities via the USSD *866#.
2). The delay
According to Ochieng’ it is important to note that opening a CDS account with CBK can take up to two weeks before you get an account number.
“This is the biggest undoing because an offer such as the current infrastructure bond can elapse before an applicant has an account number to take part,” he says.
Although you can later on still buy when the bond is in the market, this option is not the best for small retail investors.
“Don’t postpone opening your CDS account today out of fear of missing out on the current infrastructure bond. The market is anticipating a second infrastructure bond within the year,” says Ochieng.
3). Bidding
You have to fill an application form which you will collect from the CBK. “The bond application details you will include are the indication of the bond you want to buy such as Issue Number, duration and the face value amount you want to invest,” says Chacha.
“Other details include personal information like your full name, phone number, CDS account, bank account number provided specified in the mandate card and whether the funds you’re investing are coming from a local or offshore source.”
He also says that you will need to select the interest or coupon rate of the face value investment you will receive in interest payments every six months.
“You will have the rollover option through which your interest can be re-invested or in which you can purchase additional securities instead of the money being sent to your bank account,” he says.
4). The auction results
The CBK decides which bids to accept and which to reject. “If you have submitted an application, you must contact or visit the CBK or its branches to determine if your bid was successful and how much you need to pay,” says Ochieng’.
5). The payment
If your bid was successful, Ochieng’ says that you must pay within the stipulated payment period, failure to which you could be barred from investing in government securities.
Chacha adds that you will submit your payment through cash or banker’s cheque if the amount is less than Sh. 1 million.
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6). The maturity
You will receive interest payments every six months in your bank account throughout the period of the bond.
Remember, you can opt to have these payments reinvested or rollover. “On maturity, you will receive the last interest amount and face value of the invested amount,” says Chacha.