1.0 Notice
·
This
new prospectus only applies to bonds issued under the new terms and conditions.
Already issued bonds will continue to be governed by the original prospectus
and will continue to be traded over the counter.
1.1 Advantages of Treasury Bonds
·
They are
transferable and negotiable.
·
They can be pledged as collateral.
·
The rate of return is competitive.
·
They are issued through market-based procedures.
1.2
Auction
Process
·
A press
release will be issued one week before each auction, announcing the auction
date, size of issue, coupon rate and other terms and conditions.
·
Investors are
invited to submit bids using tender forms, through primary dealers (PDs) or
directly to the Bank of Tanzania (BoT) for direct investors.
·
Bid forms are
available from the BoT Head office, BoT Branches, and from Primary Dealers.
Samples of bid forms are displayed in section 3.1.
·
The auction for Treasury bonds (T-bonds) will be
conducted through the multiple price system basis, where each successful bidder
pays the price s/he quotes for the amount of T-bonds s/he wants to purchase.
The winners are listed, starting with the highest bid price, down to the lowest
bid price that exhausts the face value amount of T-bonds offered for sale.
·
The results of the auctions are displayed at the
BoT Head Office Notice Board and at all the BoT branches, and at BoT’s website:
http://www.bot-tz.org. PDs are also required to display the auction results at
their counters.
1.3
Payment
and Settlement Procedures
·
Successful bidders are obliged to settle their bids
within one day after notification of the auction results (T+1).
·
Payment should be done through debiting primary
dealers’ accounts opened at the Bank or by bankers’ cheques for direct
investors, drawn on the ‘Bank of Tanzania – Domestic Accounts Department,’ P.O.
Box 2939, Dar-es-Salaam.
·
In case of non-compliance with the time limit for
payment, successful bidders will be disqualified from participation in the next
four (4) auctions. In case of no payment at all, the Government reserves the
right to indefinitely bar the investor from participating in auctions.
·
Interest will be paid semi-annually in the form of
a cheque drawn against the holders’ names in the BOT’s book entry registry
system.
1.4
Redemption
·
On maturity, T-bonds will be redeemed through PDs
or directly at BoT.
·
Investors
will receive the par value (100 percent) of their respective bids.
·
All T-bonds purchased at discount in the primary
auction, and held to maturity, will be subject to capital gains tax.
1.5 Secondary Market
Trading
·
After the primary auction, T-bonds may only be
traded at the Dar es Salaam Stock Exchange (DSE) in multiples of TZS 100,000.
Prospective investors should approach the DSE’s registered broker-dealers so as
to place their buy or sell orders. All the rules and guidelines for trading
bonds at the DSE apply.
·
The weighted average price from the primary auction
serves as the indicative listing price for a new T-bond. Bond pricing
modalities for tranched (reopened) bonds are explained in Part C attached.
·
After transactions occur, the DSE informs the BoT
immediately so that it can update its register with respect to the holders of
the respective securities. The BoT makes interest and principal payments on
behalf of the Government.
1.6 Investor
Eligibility
·
Investments in T-bonds are restricted to Tanzanian
residents only.
1.7
Reservation
· The
BoT reserves the right to accept or reject part or whole of any bid.
I.
Calculating the Price and Yield to Maturity (YTM) of a Bond
The price and yield to
maturity of a bond are mirror reflections of each other. The two are inversely
related and one is needed to arrive at the other. Thus if price is given, an
investor can calculate the yield on the bond, and compare it with his/her own
required rate of return to see if the bond is a worthy investment or not.
Alternatively, an investor can work out the price he/she would be willing to
pay for a bond given his/her yield requirement.
The price of a bond and
its yield to maturity are held together by the following equation:
P = C + C + … + C + M ……
Equation A
(1+y)1 (1+y)2 (1+y)n (1+y)n
where P = price of the bond
C = semi-annual coupon (interest
payment)
M = maturity
value, usually 100%
y
= yield-to-maturity
n = number of periods (number of years
x2)
Thus, the yield to
maturity (y) is essentially the bond’s internal rate of return (IRR); i.e.,
that discount rate which makes the present value of all the bond’s future bond
cash inflows (“C”oupon + principal at “M”aturity) EQUAL to the current price of
the bond (initial investment outlay). As such it is the value of ‘y’ that
satisfies Equation A above.
Example: FROM PRICE TO
YIELD
Suppose the Government announces a call for tender
for a 5-year bond with coupon rate of 7.5% p.a. payable semi-annually. Let’s
assume the weighted average price (WAP) achieved in the auction was 100.3498.
Price = 100.3498 =
3.75 + 3.75 + …. + 3.75 +
100
(1+y)1 (1+y)2 (1+y)10 (1+y)10
1)
Solving y using EXCEL’s IRR yields 3.7075% semi-annually or 7.415%
p.a.
The same can be determined using the YIELD
function:
=YIELD(settlement date,maturity
date,coupon rate,bond price,par value,no. of coupons per year)
Thus, putting the values as
follows:
=YIELD(“15-Feb-2002”,“15-Feb-2007”,7.5%,100.3498,100,2)
= 7.415%.
2) Yield to maturity can also be estimated using a
pocket calculator by computing the semi-annual yield as follows:
s.a. yield = coupon yield +
capital gains yield
=coupon/average price + [(par value-present price)/n]/average price =3.75/[(100.35+100)/2] +
[(100-100.35)/10)]/[(100.35+100)/2)]
= 3.7434% + (-0.0349%)
Semi-annual yield
= 3.7085%
Annual
yield = 7.417% p.a. ~ 7.415% p.a. calculated
above using Excel.
This
is a reflection of the government’s actual weighted average yield paid out to
investors. The fact that the bond sold for a premium is consistent with the
coupon rate (7.5%) exceeding the required yield (7.415%). If the price were TZS
99, the yield would have been 7.745% p.a., which is higher than the offered
coupon.
Example: FROM YIELD TO
PRICE
If the investor knows
his/her yield or required rate of return
(or discount rate), it is a simple matter to arrive at the price s/he
should pay for a bond.
1) Price can be estimated manually
as follows:
(i)
Say an investor wants an internal rate of return or yield to
maturity of 6% per annum or 3% semi-annually. The bond price would be as
follows:
P =
3.75/(1.03)1 + 3.75/(1.03)2 +…..+ 3.75/(1.03)10
+ 100/(1.03)10 = 106.3977. Thus, the bond sells for a premium.
(ii)
Say an investor wants an internal rate of return or yield to
maturity of 9% per annum or 4.5% semi-annually. The bond price would be as
follows: 3.75/(1.045)1 + 3.75/(1.045)2 +…..+ 3.75/(1.045)10
+ 100/(1.045)10 = 94.0655. Thus the bond sells for a discount.
(iii)
Say an investor wants an internal rate of return or yield to
maturity of 7.5% per annum or 3.75% semi-annually. The bond price would be as
follows: 3.75/(1.0375)1 + 3.75/(1.0375)2 +…..+
3.75/(1.0375)10 + 100/(1.0375)10 = 100. Thus the bond
sells for par.
=PRICE(settlement date,maturity
date,coupon rate,yield,par value,number of coupons per year,day count basis)
Thus putting the values as follows
produces a price of 106.3977:
II.
Calculating the Price of a Tranched or Reopened Bond
Buying a tranched bond in an auction is exactly similar
to buying a bond in the secondary market. The only difference is that while a
bond in the secondary market is purchased from an investor who has held that
bond up till that time, a tranched bond is purchased from the government who
was holding the bond since the parent issue. Suppose that on 15 March 2002 the
Government auctions a reopening (tranche) of the 5-year bond with a coupon rate
of 7.5% p.a. paid semi-annually and a maturity date of 15 February 2007. Assume
that an investor’s required rate of return is 6% p.a. or 3% semi-annually.
Applying the formula above, the investor’s bid price, the ‘clean’ price
(excluding accrued interest), would be 106.3052.
This can be determined from the EXCEL PRICE function (explained earlier), by
changing the settlement date from “15-Feb-2002” to “15-Mar-2002”.
However, like any other investor holding a bond, the
Government would be eligible to collect the coupon interest accruing between
15-Feb-2002 and 15-March-2002. Accrued interest is determined as follows:
=3.75*(“15-March-2002”-“15-Feb-2002”)/(“15-Aug-2002”–“15-Feb-2002”)
= TZS 0.5801.
Therefore, the total price
that the investor would pay, if successful, would be TZS 106.8853
(=106.3052+0.5801). This price is also known as the ‘dirty price’. This is the
price the government expects the investors to bid in auctions.
3.1
Sample of the Bid Form for Direct Investors
3.2 Sample
of the Bid Form for Primary Dealers
All
forms should be officially stamped.
|
E.
REGISTERED PRIMARY DEALERS
|
Eighteen primary dealers have been registered by
the Bank to date, namely:
(i)
Akiba Commercial Bank Ltd.
(ii)
Citibank (T) Ltd.
(iii)
CRDB Ltd.
(iv)
Diamond Trust Bank (T) Ltd.
(v)
Eurafrican Bank (T) Ltd.
(vi)
Exim Bank (T) Ltd.
(vii)
Habib African Bank Ltd.
(viii) International
Bank of Malaysia (T) Ltd.
(ix)
Kenya Commercial Bank (T) Ltd.
(x)
NBC Limited
(xi)
NMB Ltd.
(xii)
Orbit Securities Co. Ltd. (also a DSE broker)
(xiii)
Rasilimali Limited (also a DSE broker)
(xiv)
Solomon and Co. Limited (also a DSE broker)
(xv)
Stanbic Bank (T) Limited
(xvi)
Standard Chartered Bank Ltd.
(xvii) Tanzania
securities Ltd. (also a DSE broker)
(xviii) Vertex
International Securities (also a DSE broker)
ENQUIRIES SHOULD BE DIRECTED TO:
The Commissioner The Deputy
Director
Policy Analysis
Department Domestic
Markets Department
Ministry of Finance Bank of
Tanzania
P.O. Box 9111 P.O.
Box 2939
Dar-es-Salaam. Dar-es-Salaam.
Tel: 022-2110331 Tel:
G/L 022 - 2110945-7
Fax: 022-2123574/2110326 D/Line: 022 -
2114770/2115128
Fax:
022-2115126
________________________________________________________________________
Branch
Director,
BOT
Arusha,
P.O
Box 3043,
Arusha.
Tel:
027 - 2508341-3/7091
Fax:
027 - 2508225/2508344
Branch
Director,
BOT
Mwanza,
P.O
Box 1362,
Mwanza.
Tel:
028 - 2500313/2500315-8
Fax:
028 - 250074
Branch
Director,
BOT
Mbeya,
P.O
Box 1203,
Mbeya.
Tel:
025 - 2503321-5
Fax:
025 - 2502844
Branch
Director,
BOT
Zanzibar,
P.O
Box 568,
Zanzibar.
Tel:
024 - 2230803
Fax:
024 - 2231441
FEBRUARY 18, 2002
*********
