Government bonds and how to invest in them

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What Are Government Bonds?

Government bonds are essentially loans you give to the government. In return, the government agrees to pay you interest at regular intervals and return your initial investment (the principal) at the maturity date.

Real-Life Example: BW003 Bond

Let’s consider the BW003 bond issued by the Government of Botswana:

• Bond Name: BW003

• Annual Interest Rate (Coupon): 10.25%

• Maturity Date: 31 October 2015

• Yield to Maturity (YTM): 3.60%

• Price per 100: 103.54208

How Does This Investment Work?

Suppose you decide to invest P10,000 (which is the minimum buying price) in the BW003 bond. Here’s how your investment would unfold:

1. Purchase Price: The bond is priced at 103.54208% of its face value. So, you’d pay:
   P10,000 × 103.54208% = P10,354.21

2. Interest Payments: The bond pays interest (coupons) semi-annually. Each payment would be:
   (P10,000 × 10.25% × 182.5 days) / 365 = P512.50

3. At Maturity: On 31 October 2015, you’d receive:
   

   • Your original P10,000 investment

   • The final interest payment of P512.50

Note: This excludes the other interest payments you would have received every six months before the bond matured.

Key Terms Explained

• Coupon Rate: The annual interest rate paid by the bond.

• Yield to Maturity (YTM): The total return anticipated if the bond is held until it matures.

• Price per 100: The price of the bond expressed as a percentage of its face value.

  Benefits of Investing in Government Bonds

  • Safety: Government bonds are considered low-risk investments.

  • Regular Income: They provide predictable interest payments twice a year.

  • Capital Preservation: If held to maturity, you get back your full investment amount.

Getting Started

To invest in government bonds through FNB Botswana:

• Minimum Investment: P10,000, with increments of P500.

• Custody Account: You’ll need to open one for safekeeping of your investment.

• Custody Fee: P100 minimum or 0.07% of the nominal value per annum, whichever is lower.

Note: FNB, isn’t the only way to buy government bonds, you can also buy from Absa, Standard Chartered Bank and other commercial banks, but as for corporate bonds you buy them from BSE stock brokers.

Source: FNB Botswana