The government has floated a three-year treasury bond based on the interest rate determined by the market -- a first for the country -- with a view to diversifying the securities market.
The existing government securities have fixed interest rates, so the new debt instrument -- Floating Rate Treasury Bond (FRTB) -- will encourage individuals to go to the secondary bond market as there will be a good possibility to enjoy a hefty return given the country's socioeconomic development.
“This is a good initiative,” said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a platform of private banks' managing directors.
The FRTB, which is worth Tk 500 crore, was issued by the central bank on Monday in the primary bond market.
Three banks -- Sonali, NRB and South Bangla Agriculture and Commerce -- purchased Tk 112 crore of the bond, while the remaining amount was mopped up by the central bank itself.
The interest rate on the bond was set at 6.50 percent through an auction, which is higher than the existing 6.44 percent interest rate for five-year treasury bonds.
Before this, there were five government treasury bonds in the market with maturities ranging from two years to 20 years but with fixed interest rates.
For instance, the interest rate on the five-year treasury bond is now 6.44 percent and those who invested in the instrument will get the same return upon its maturity.
But those who invest in the FRTB can get more or less than 6.50 percent as the yield is floating. The interest rate of the instrument will change every three months.
The clients are now enjoying interest two times a year from the traditional bond, but the facility is doubled for bondholders of the FRTB.
The interest rate on the FRTB will be fixed calculating the Bangladesh Compounded Rate (BCR) and adding a spread set by lenders.
The BCR is a daily rate announced by the central bank on its website. It is a compound rate calculated from the average interest rate of 91-day treasury bills in the previous 91 days.
Both individuals and institutional investors will be eligible to purchase and hold the FRTBs.
Non-resident investors will have to purchase the FRTBs with funds from a non-resident foreign currency account, or a Non-Resident Investor's Taka Account (NITA) with a bank in Bangladesh in the name of the purchaser.
They can transfer coupon payments (interest) and resale or redemption proceeds abroad in a foreign currency.
A Bangladesh Bank official said that the government might issue more bonds with floating rate to reinvigorate the bond market.
The bond market will be able to attract many individual and institutional clients if the reforms continue as a good number of people are shying away from the banking sector on the back of growing financial scams, he said.
The FRTB will help the government manage its budget deficit, said Rahman, also the managing director of Dhaka Bank.