How to trade M-Akiba bond in secondary market

A CRUCIAL PIECE of information was omitted from the prospectus and the terms and conditions for the newly launched M-Akiba Treasury bond. It was only on April 11 (four days after the closing of the primary sales) that the public became aware that there will be a contracted bank to buy any M-Akiba bonds that cannot get buyers at the Nairobi Securities Exchange. In effect, any bond holder wishing to cash their investment is guaranteed a buyer.

Without that information, I was of the view that it would be difficult for investors to cash their M-Akiba bonds. Well, now I know that it will be easy. But the question is: what would be the best price?

When trading bonds in the secondary market, it is important to detach two things: the price of the bond and the interest it has earned. If you bought the M-Akiba and you want to sell it before the first interest payment date, you surely deserve to be given the earnings it has made as of the selling date, don’t you?

Bond brokers talk about clean price (that of the bond alone) and dirty price (includes accrued interest).

SUPPLY AND DEMAND

Suppose you have a Sh100,000 M-Akiba bond; you will be paid Sh5,000 on October 9, 2017 – that is, after six months, or 181 days. Therefore, your investment is earning Sh5,000 divided by 181 = Sh27.62 per day.

Thus, as of today, you have held the bond for six days and you have earned Sh165.75 in interest. Tomorrow, the total earnings will be Sh193.37.

If you decide to sell it off tomorrow, the buyer must be prepared to refund you this Sh193.37 before you start negotiating the price of the bond. The reason is that if you sell it, the buyer will get the entire Sh5,000 interest come October 9. What about you?

What you will be selling is the bond, not the interest earned so far. The price of the bond will then be determined by the forces of supply and demand. Nothing stops you from asking for a clean price higher than the Sh100,000 you invested. Conversely, nothing stops a buyer from offering you less than Sh100,000!

Still, there is the small matter of trading commissions. Again this information is not provided clearly. I called the M-Akiba office and was told that it is 0.535 per cent of the face value of the traded bond and that this is charge on both the buyer and the seller.

Thus, if you sell your Sh100,000-bond at Sh100,000, you will get Sh99,465 plus the Sh193.37 accrued interest. The total is Sh99,658.37. To make money, you must sell it at Sh100,535 or more.