Bond Redemption Structure & Bond Amortization Explained

Written by Agatha

May 28, 2022

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Every Treasury Bond has terms and conditions stipulated in the bond prospectus. This document:

bond amortization

Kenyans are used to having long-term bonds where there’s only one redemption date (when your principal amount is paid back in full). For example, a 2022 18- year bond where your money will be paid in full in 2040.

If you’re a visual learner, watch the same on our YouTube Channel:

However, the June 2022 Infrastructure Bond has 2 conditions that people seem not to understand and I’ve been receiving numerous questions from The Wealth Tribe. You need to understand the 2 conditions before you invest:

✅ Redemption Structure &

✅ Amortization.

Redemption Structure answers the question: When will your principal amount be paid? 

Bond amortization means the gradual or regular repayment of the face value (principal) and the interest on the bond in the course of its life. i.e the process of paying off a debt with regular payments.

Now that you understand the meaning of the two, let’s get to the specifics:

bond amortization

Tenor (Time Period):  18 Years

Redemption Date: 2040

Redemption Structure: 

  • 2nd June 2031 – 50% of unencumbered outstanding principal amount. 

 

  • 21st May 2040 – 100%, final redemption of all outstanding amounts. 

 

Amortization: No partial redemption will be paid on encumbered securities on amortization dates. Any amounts up to Kshs 1.0 million per CDS account at amortization will be redeemed in full except for encumbered securities.

Encumbered securities: these are bonds that have been used as collateral for a loan. We often hear real estate investors saying that “the land has encumbrances” after a search, to mean that the land was used as collateral for a loan and therefore cannot be transferred to a new owner.

So, what do the above terms mean in layman’s language?!

Those who invest 1 million or less will get their FULL principal amount back in 10 years(2nd June 2031). 

In a nutshell, this is a 10-year Infrastructure bond for anyone who invests 1 million or less. Because you’ll get ALL your money back on 2nd June 2031, it also means that will be the end of receiving interest payments.

This is great for retail investors most of whom put in amounts under 1 million. You get ALL your money back midway through the life of the bond to spend or invest elsewhere. Secondly, it lowers your inflation risk because returns on this bond are not inflation-adjusted.

Those who invest more than 1 million will get back half of their principal amount back in 10 years (2nd June 2031) and the other half in 2040.

Note: If you use your bond as collateral for a loan, the partial redemption won’t apply to you: you won’t get paid on June 2031. 

The rising interest rates are still a risk to your Investment.

Rising interest rates affect the market value of bonds, especially bonds with longer maturities. Being able to cash in part of your principal sooner gives you the ability to invest in other high-yielding instruments.

Higher interest rates= Lower Bond Prices

In other words, interest rates are expected to rise in line with rising inflation, so investors are wary of the risk rising interest rates pose to the market value of bonds.

bond amortization

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