Guaranteed income stream with little risks
Financially solvent people want to invest so that their funds don't remain idle as they long for a good return on their investment. For this, they always seek a secure instrument.
The government's Treasury bond is the newest investment tool for the investors in Bangladesh looking to diversify their portfolio instead of relying on only deposit schemes of banks, national savings certificates, stocks, and mutual fund units.
The opportunity came after the trading of treasury bonds in the secondary market of the Dhaka Stock Exchange made its debut on October 14, albeit on a trial basis, ending a wait of more than a decade.
Some 222 government bonds, with a combined value of Tk 55,000 crore, were listed with the premier bourse of the country between 2005 and 2011. The government borrows funds from the market by issuing bonds.
But they were not traded like shares and mutual fund units as there was no secondary market. Now they will be traded like stocks and mutual funds, and the full-fledged trading may begin in November or December.
The investment in bonds will be particularly important at a time when the deposit rate against the savings schemes at banks has slipped below the average inflation rate, making the net return on investment negative.
In another blow for the savers, the government has cut the interest rate on the national savings certificates and capped investment. Also, risk-averse investors see the stock market too unsafe.
In such a situation, Treasury bonds could be a good window of safe, secured and risk-free investment.
Bonds are investment instruments that have maturities of more than a year. The tradable bonds have the maturity of two, five, 10, 15 and 20 years.
Treasury bonds could be one of the most important investment tools for elderly investors as the income stream is guaranteed while the principal amount is preserved.
The coupon rate of Treasury bonds has remained higher than the interest rate on deposits offered by banks.
The investment procedure for Treasury bonds is similar to that of stocks and mutual funds.
Earlier, investors needed to open a business participant ID with the Bangladesh Bank to trade bonds under a system of the central bank.
Now, they will be able to buy the bonds and sell them in the stock exchange through beneficiary ownership accounts opened with a brokerage house or merchant bank, according to Arequl Arefeen, head of Treasury of Bank Asia.
There are two ways to make money by investing in bonds. First, investors can hold them until their maturity and collect interests. The interest is usually paid on a half-yearly basis.
The second way is to sell them at a price that is higher than what they pay for it.
Investment in government bonds offers many advantages. One of them is attractive profit.
T-bonds are issued by the government, so the investment is risk-free as the default risk is zero, Arefeen said.
Profit earnings are receivable even for the holding period of a day. The rate of return is relatively higher than other investments.
Many investors also want to invest in bonds to receive tax rebates.
The disadvantages include rising interest rates, market volatility, and credit risk.
If a borrower's credit risk profile improves so that it is more likely to repay the bond on maturity, the price of the bond typically rises, said Shaheen Iqbal, head of Treasury of Brac Bank.
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