On the change in bond insurance by the Bank of Zambia, by Bright Chizonde

Recently, the Bank of Zambia issued the following Public Notice:

“The Bank of Zambia wishes to inform the General Public and investors in Government securities that effective from January 2024, the Government of the Republic of Zambia bonds (GRZ bonds) will be issued at par in the primary market for all new issuances. This means that Government bonds will be sold at their face value, that is, the cash amount to be invested will be the same as the face value amount.

“Issuance at par entails that the coupon rate for each instrument will be determined during the auction. We further wish to advise that the coupon rate for each instrument on auction will be the respective highest accepted yield rate. Re-issuances of any existing bonds and secondary trading of any bonds may be done at discount, par or premium depending on market conditions.

“The change has been made to streamline Government debt metrics and debt service in general.”

This public notice from Zambia’s Central Bank provides information about a change in the issuance method of the Government of the Republic of Zambia bonds (GRZ bonds). Here’s a breakdown of the key points:

1. Change in Issuance Method: Effective from January 2024, there is a change in the way the government bonds are issued in the primary market. Remember that the Primary market is where bonds are issued for the first time.

2. Issuance at Par: The new method involves issuing the GRZ bonds at par in the primary market for all new issuances. “At par” means that the bonds will be sold at their face value.

Let me give an example; if an investor is Paying K2.8 million for a Bond valued at K3.0 million, this is called buying at a discount. The K2.8 million is the Par Value while the K3.0 million is the Face Value. The return on the Bond will be the interest rate which is called the Coupon Rate plus the K0.2 million, since GRZ will pay back K3.0million upon maturity. The change means that the Bond will be sold at K3.0 million and will have the Face Value of K3.0 million, this is selling “At Par”. This means that the only return will be in form of interest or coupon rate as no discount is offered at the point of sale. This leads me to point 3;

3. Face Value: This means Investors will need to invest an amount equal to the face value of the bond. There won’t be any premium or discount; the cash amount invested will be the same as the face value amount.

4. Coupon Rate Determination: The coupon rate for each bond will be determined during the auction process. The coupon rate will be the respective highest accepted yield rate during the auction. This means, since there is no discount, the Coupon rate will not be set in advance, this will be determined using an auction. Example, BOZ will offer a low rate and see who is willing to buy and will continue to increase it in order to get more investors to buy the bonds.

5. Re-issuances and Secondary Trading: Re-issuances of existing bonds and secondary trading of any bonds may be done at a discount, par, or premium depending on market conditions. This suggests that existing bonds may still be traded at different prices in the secondary market.

6. Purpose of the Change: The change in the issuance method is aimed at streamlining Government debt metrics and debt service in general. I think this means it is easier for government to plan and project debt based on interest alone as compared to having different discounts as well as coupon rates.

In summary, the main change is the shift to issuing government bonds at their face value in the primary market, with the coupon rate being determined during the auction process. This is done to simplify debt metrics and debt service for the government. Existing bonds may still be traded at different prices in the secondary market based on market conditions.

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