Investing in Government Debt Securities

(continued from last week)

What are Government Debt Securities ?

Government debt securities are the Treasury Bills and Bonds issued by the Central Bank.

* They are gilt edged (zero default risk) securities, which are exempt from debit tax and capital gains tax.

* They generally pay higher rates of interest than savings accounts or fixed deposits.

* Treasury Bills are available with maturity periods of three months, six months or one year. Treasury Bonds have maturity periods varying from two to 20 years.

How are Government Debt Securities traded ?

CSE offers order driven screen based trading facilities for the secondary trading of debt securities. Trading takes place through CSE's Debt Secretaries Trading System (DEX) through a DEX trading member of the CSE.

What are the main features of Government Debt Securities ?

* All Government securities with the exception of Treasury Bills, are coupon or interest rate bearing, and have semi-annual coupon/interest payments with a tenor of between two to seven years. For e.g., at 11.50 per cent Treasury Bond will carry a coupon rate (interest rate) of 11.50 per cent on its face value, payable semi-annually 10-year and 15-year bonds are also available, issued for the first time in Sri Lanka in January 2003.

* Treasury Bills are for short-term instruments issued by the Central Bank of Sri Lanka for financing the temporary funding requirements and are issued for maturities of three, six and 12 months.

* T-Bills have a face value and no coupon (no interest payment). Treasury Bills are instead issued at a discount to the face value. The difference represents the return to the investor obtained at the end of the maturity period.

Why invest in Government Debt Securities ?

* The Zero Default Risk is the greatest attraction for investment in Government debt securities (Treasury Bills and Bonds), so that it enjoys the greatest amount of security possible.

* Government guarantee for repayment of interest and principal sum invested.

* Higher leverage available in case of borrowing against Government debt securities.

* Greater diversification opportunities.

* Adequate trading opportunities with continuing volatility expected in interest rates.

* The returns earned on Government debt securities are normally taken as the bench mark rates of returns and are referred to as the risk free return in financial theory. The risk free rate obtained from Government debt securities are often used to price other debt instruments issued by companies.

* Investors have the option of trading their Government debt securities prior to the redemption date.

However, it could lead to a capital gain or loss depending upon the marked price.

Who are the main investors of Government Securities ?

Banks and other large institutional investors such as the EPF, ETF and National Savings Bank (NSB) are some of the larger investors and account for the majority of market share. However in the recent past, there have been a growing number of individuals investing in the debt securities market.

What is the issuance process of Government Debt Securities ?

Government debt securities are issued by the Central Bank of Sri Lanka (CBSL) in a price-based auction basis (participants bid a price for a bond with a fixed-coupon). The auction held is a uniform-price auction (all participants get allotments at the same price).

How can Investors buy Government Debt Securities ?

The public does not have access to the primary auction. Investors may submit their bids through a registered primary dealer or they can also purchase Government securities from the secondary market.

How do you buy/sell Government Debt Securities ?

On the secondary market through a DEX trading member

* Speak to a DEX trading member.

* Open a trading account with the Central Depositing System (CDS) of the CSE.

* If you wish to sell, transfer title of your Government securities to CDS, hence CDS becomes legal holder and you can sell its beneficial interest.

* If you wish to buy, place an order with a brokering firm and you obtain the beneficial interest of the Government securities.

* It is the beneficial interest of the Government securities that can be traded at the CSE through DEX, if you so wish to and you may buy or sell using one of the settlement option given.

What are my transaction costs ?

A transaction cost is charged when buying and selling Government debt securities. All transaction cost are negotiable.

How is settlement made ?

Government debt securities should be bought or sold using one of the Boards mentioned below. The settlement cycle will depend on the Board chosen by you for trading and vary according to the different settlement dates.

* CASH Board - Settlement on Trade date (T)

* TOM Board - Settlement on T+1

* SPOT Board - Settlement on T+2

* Forward Board - Settlement over T+2

* Crossing Board - Negotiated trades

* Sell and Buy Back (SBB) Board - Sale/purchase on a predetermined date in future at a predetermined price.

* SBB Crossing Board - Negotiated SBB transactions. (T represents the trade day)

Trading Members of the CSE

Seylan Merchant Bank Ltd., National Wealth Corporation Ltd. and Capital Alliance Holdings Ltd. All Stockbrokers are also licensed to trade in Debt.