The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower-yielding security is reopened in a high interest rate environment. Â
The discounts serve to lift the rate of return since the interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount.
A 10-year bond issued in March this year has the highest coupon of 16 percent among its group of securities.
The weighted average rate on securities of similar duration or longer issued recently has mostly ranged between 16.5 percent and 17.7 percent as interest rates rose rapidly from last year.
The two bonds whose interest and discount is subject to a withholding tax rate of 10 percent, will be on sale until October 9.
The jump in interest rates was caused by the government's borrowing appetite in the domestic market as well as the CBK’s actions that aimed to support the shilling and lower inflation.
The monetary authority raised its benchmark lending rate multiple times to a peak of 13 percent before lowering it to 12.75 percent last month citing a now-stable exchange rate and a fall in the cost of living.
The rise in the Central Bank Rate (CBR) sent commercial bank lending rates above 20 percent while interest on government bonds and Treasury bills rose to the current high teens.
High interest rates help to attract inflows of hard currencies going to government securities while also making it costlier to borrow for investment or consumption, ultimately containing inflation.
The CBK is expected to further cut its benchmark lending rate going forward, signalling that returns on fixed income assets could also start falling from their current levels.
