Question

QUESTION TWO Explain the main investment asset classes available in Zambia while providing examples of the common securities available under each type. [TOTAL: 20 Marks]

Answer 1

Question:Explain the main investment asset classes available in Zambia while providing examples of the common securities available under each type.

Answer:

Following are the main investment asset classes available in Zambia

A)Treasury Bills:

Since 15th January 1993, the market for Treasury bills has been open to the general public to purchase Treasury bills directly from the Bank of Zambia.

The following are the Features & procedures to buy a Treasury bill,

1)The maturity period of the Treasury bills are 91, 182 and 273 days.

2) Multiple pricing.

3)Minimum face value per bid is K30,000,000.00 (US$6, 000.00).

4)Invitation to the general public is through the national press.

5)Successful bidders pay the price tendered.

6)The Bank of Zambia maintains records in a book entry system (BES) as no physical certificates are issued.

7)Auctions are held once a week.

8)Day count conversion is Actual/365

9)Bids should contain the volume and the price

The information for up coming auctions is delivered via different media. This information is delivered through adverts the national daily papers, posted on the BoZ website and the Reuters. The Treasury bills auctions are held once a week on Thursday and settlement is the following Monday, that is, T + 3.

Treasury bills are always bought at a price less than the actual value of the instrument and the interest is the difference between the actual value of the instrument and the price you buy it at.Example, you want you purchase a K1000 worth Treasury bill for 3 months. The selling price of the Bill will be less than K1000,let’s assume K880. On the maturity day of the Bill, you will be paid a K1000 and that implies the profit gained is K120 (K1000-K880). So under a Treasury bill,the interest is the profit you make.

B)Government Bonds:

The government bonds issued in the market are fixed coupon bonds. To further increase the number of long term dated government securities with the following features:

1)The bonds are coupon paying instruments and the coupon rates are set a few percentage points above the Treasury bills yield rate.

2)Minimum face value per bid is K30,000,000.00 (US$6, 000.00)

3)Invitation to the general public is through the national press.

4)Successful bidders pay the price tendered.

5)The Bank of Zambia maintains records in a book entry system (BES) no physical certificates issued.

6)Coupon interest is paid semi annually.

7)Day count conversion is Actual/365.

8)Auctions held once a month.

9)Bids should contain the volume and the yield rate

The information for up coming auctions is delivered via different media. This information is delivered through adverts in the national daily papers, posted on the BoZ website and the Reuters. The government bonds auctions are held once a month on Fridays and settlement is the following Monday, that is, T + 2.

Government Bonds can be bought at a price less than, equal or more than the value of the Bond.The government pays a fixed rate of interest (called the coupon) every six months and then the value of the Bond on the Maturity date. So here, there is an interest that is paid every six months for the period of your investment and the value of the Bond paid at the end of the deal (At maturity).Example,if you invest K20,000 for a period of 5 years, you will be receiving interest payments every six months and at the end of the five years, you will receive the K20,000 and the interest for that period.