Postby Country_Bookie » May 4th, 2012, 5:17 pm
Tried attaching this but since u can't attach pdf or doc files, copy pasta will have to do:
This is the first of a three-part series on government bonds. The first part provides an overview of government bonds, the second will explain some commonly used terms in the government bond market and the third will provide some explanations on bond calculations. The series will be presented in the form of some frequently asked questions.
What are government bonds?
A Government bond is an instrument used by governments to borrow money. It is one of the most secure types of investments available as the likelihood that the government will not repay its debt is very low. The purpose for the issue of a government bond is explained to the public in the bond documentation which is published in the daily newspapers.
In Trinidad and Tobago, government bonds are issued for periods of more than five (5) years. During the life of the bond, the government pays interest to bondholders and the principal amount borrowed is returned either at the end of the period or over some specified period.
How are Bonds Issued?
Currently government bonds are issued through an electronic auction system at the Central Bank. The auction is opened for approximately two weeks.
Information on the bond is documented in a Bond Information Memorandum which is published in the daily newspapers and posted on the Central Bank’s website.
The public can purchase bonds on a competitive or a non-competitive basis
What is competitive and non-competitive bidding?
Individuals bidding competitively state the amount of the bond required and the highest price which they are willing to pay for the bond. However, if their bid is below the price determined by the auction process, competitive bidders will not be allotted any bonds.
In the case of a non-competitive bid, the buyer states the amount required (up to a limit of $20,000) and agrees to accept the cut-off price determined by the auction process.
How is the cut-off price determined?
The total amount of non-competitive bids is set aside then the competitive bids are arranged by price from highest to lowest. Bids are accepted starting with those which have the highest price until the bond is fully allocated. The last price that allows the bond to be fully allocated is called the cut-off price. This
price is paid by both successful competitive and non- competitive bidders. This is what is called a single price auction system. The entire process takes place automatically in a computerized system.
Do I get a bond certificate as evidence of purchase?
No. Bonds are now being issued in electronic form, that is, ownership is registered on an electronic system with the Registrar which is the Central Bank. The Registrar provides bondholders with periodic statements of ownership.
Previously, a paper bond certificate was issued. However, while this provided bondholders with tangible evidence of ownership, there was a major disadvantage in that it made the sale of the bond difficult. This is because the process of changing the paper certificate to the new owner was lengthy.
In modern systems therefore, bonds have been “dematerialised” that is, the records of bondholders are kept on an electronic register by the Bond Registrar. The Central Bank uses this system and provides bondholders with periodic confirmation of their holdings. This system allows the operation of changing the ownership to take place quickly and safely. The new arrangement therefore provides more flexibility to bondholders.
Who can buy these bonds?
Individuals as well as institutions - Pension Funds, Financial Institutions and Non-Financial Institutions – can purchase bonds. The government currently issues all its bonds through an automated auction system at the Central Bank. At the time of issue, the bond documents indicate where bonds can be purchased. The public can also obtain this information by calling the Domestic Markets Department at the Central Bank.
After a bond is issued, the public can buy and sell the bond in the secondary market through a government securities intermediary.
What are Government
Securities Intermediaries?
Government Securities Intermediaries (GSI) are financial institutions which act as the Bank’s counterparty in auctions of government bonds. They undertake to purchase the bonds from the Central Bank either on their own behalf or on behalf of the public. These GSIs have also undertaken to provide a
secondary market by buying and selling government securities.
What are the benefits and risks of purchasing government bonds?
One of the many benefits of buying a government bond is that it is generally the safest form of investment since the possibility of a government defaulting on its repayment is very low. In fact, the obligations of the Government of Trinidad and Tobago meet internationally accepted investment grade standards. There are few entities that borrow locally that can boast of this status. Inclusion of such an instrument in a portfolio reduces the overall risk of an investor’s local portfolio because of the rating of the bond.
Since the terms of the bonds are medium to long term, individuals as well as institutions find it convenient to match certain expected expenditures (example for education, retirement, capital projects, etc.) with the maturities of these bonds.
Government bonds pay interest half yearly; holders have access to an income stream over the life of the bond. Commercial banks also allow the use of Government of Trinidad and Tobago bonds as security for individuals and institutional borrowing.
The major risk with government bonds, as with all other bonds, is that if holders want to sell them before they mature, this must be done at the market price. The market price may have moved up or down since purchase, depending on market interest rates. However, if the bond is held to maturity, the bondholder will receive the full amount of the investment.
Additionally, while in many countries, government bonds are bought and sold easily in what is called the secondary market, in Trinidad and Tobago, this market is not very developed and as result, bonds bought and sold less easily.
Where can I get information on a government bond?
Information on government bonds is available from Government Securities Intermediaries and/or Registrars. Moreover, for each bond it issues, the government appoints a Trustee who is responsible for looking after the interest of bondholders. The name of the trustee is identified in the Bond Information Memorandum when the bond is being issued.
Central Bank of Trinidad and Tobago
January 18, 2007
