Introduction Namibian Government long-term securities are issued in the form of Internal Registered Stock (IRS). Government securities are essentially IOU declarations (or debt instruments) by the Government in terms of the State Finance Act of 1991. Why does Government Issue securities Government securities provide the central means of financing Government deficits. The Namibian Government, like any other government, finances it operations largely through taxation and levies are applied to pay for various government expenditures such as capital projects in the form of construction of roads, schools, dams, etc. and recurrent expenses in the form of salaries for civil servants, maintenance of state assets, fuel, etc. In cases where revenue received from taxation and levies is less than the expenditure, the Government finances the difference (i.e. the deficit) by borrowing through issuing Government securities. Thus, Government securities are primarily issued for financing part of government expenditure. These securities also provide additional investment avenues for investors. Although the public has various avenues in which to invest their saving, government avenue offer the most secure investment. It rarely happens that a government fails to honor its debt obligations issued in its own currency. Thus, these securities tend to be highly marketable and liquid i.e. they are in high demand and can easily change hands in the secondary market. In addition, government securities provide additional liquid investment outlet for financial institutions, mainly commercial banks, in which they can invest their surplus funds and which can also be sold when they need to supplement their cash resources. It can also be held by banks with the Bank of Namibia as collateral against overnight borrowing. Banks also hold these instruments to meet their compulsory liquid asset requirements. Thus, the use of Government securities, as seen in many countries, forms the basis of developing secondary markets. How does a Bond work? IRS, or Bonds are capital market instruments issued for longer maturities i.e, for a period exceeding 12 months and holders may earn half-yearly interest (coupon). The Bank of Namibia acts as an agent for the Government for the issue and redemption of IRS and maintains a register which records details of each stockholder and the amount of stock held by each holder. IRS may be traded between parties at prices negotiated between them. However, the holder may only transfer IRS to any other person upon completion of a transfer form issued by the Bank of Namibia. The transferee must lodge the transfer form together with the Certificate of that Stock at the Bank of Namibia for registration of the change in ownership. IRS are listed on the Namibian Stock Exchange (NSX) where secondary trading can take place. Interest parties can, thus, opt to buy and/or sell bonds in issue on the NSX through qualified registered stockbrokers. Government stock trading can also take place over-the-counter i.e., legal trading outside the formal market. In other words, trading in Government Stocks can take place between and amongst individuals and institutions.
Taxation Section (16) (1) (1) of the Namibia Income Tax Act of 1981 exempts interest income, received by or accrued to any person (other than a company) or any external company not carrying on business in Namibia from IRS issued by the Government or any representative authority or local authority in Namibia. Capital gains are usually not taxable. However, should a taxpayer s activity of making capital gains be such a nature that it can be construed as trading, it may be taxable. Determination of the taxability of capital gains should therefore be referred to Inland Revenue. INTERNAL REGISTERED STOCK (IRS) Unlike TBs, IRS are capital market instruments issued for longer maturities i.e., for a period exceeding 12 months and holders may earn half-yearly interest (coupon). Currently the Government of the Republic of Namibia has six bonds, namely the GC07, GC08, GC10, GC12, GC15 and GC24 maturing in 2007, 2008, 2010, 2012, 2015 and 2024 respectively (Table1). However, the Government may issue new bonds from time to time in consultation with the market. Allotments are made in the ascending order of yields with lowest yields receiving a priority. The Bank acts as an agent for the Government for the issue and redemption of IRS and maintains an electronic register that records details of each holder. IRS like TBs may be traded between parties at prices negotiated between them. Like TBs, the holder may transfer IRS to any other person upon completion of a relevant transfer form issued by the Bank. The transfer form should be signed by both the Buyer and the Seller. The bonds are listed on the Namibian Stock Exchange (NSX) where secondary trading can take place. Interested parties can, thus, opt to buy and/or sell bonds in issue on the NSX through qualified and registered stockbrokers. Trading in Government stock can also take place over-the-counter, that is, legal trading outside the formal market such as the NSX. In other words, trading in Government Stocks can take place between and amongst individuals and/or institutions. The Government issues prospectuses in which the terms and conditions of proposed issues are stipulated. Details of the proposed issue are published in advance on the Bank s website, local newspapers and Reuters System and sent via e-mail. Tender forms signed under a power of attorney must also be accompanied by the original power of attorney for noting. On tenders, yields for IRS must be quoted at most to the nearest 5 decimal places. A: Example: Price calculation for bonds with more than six months to redemption Suppose the Government issued a Prospectus inviting tenders for GC10 (a bond with original maturity of 10 years) with the following terms: Trade date = 10 April 2010 Settlement date = 10 April 2010 Redemption date = 15 January 2010
Coupon = 12% per annum (or 6% semi-annually) Interest dates = 15 January and 15 July A bidder with N$100, wishes to invest in the above-mentioned Stock and expects a yield of 13.50%. What price must the bidder quote on a tender form? Bidders are required to quote the all-in-price. To arrive at the required price, bidders can use the following general formula adopted from the Bond Exchange of South Africa: All-in-price = V1 d1/d2 { ½ g (a I n + e) + 100Vn i} Where: d1 = number of days from settlement date to next interest date d2 = number of days from last tot next interest date or from settlement date to next interest date if settlement falls on an interest date. I = yield at which bond trades, as a percentage Vi = 1/(1 + I/200) g = coupon as a percentage (e.g. enter 12% as 12) n = number of complete six month periods from next interest date to redemption date ai n = (1 V n i) / (I / 200) = Present value of an annuity of 1 per six months, payable in arrears e = 1, if the bond is cum-interest (i.e., the settlement date is earlier than the date of closure of the register, which takes place a month before the coupon date). And e = 0, if ex-interest (that is the settlement date is after the closure of the register). In the former, the buyer shall pay the seller the interest accrued from the previous interest date or the clean price plus accrued interest, while in the latter the seller pays the buyer interest for the period from settlement date to the day of interest payment or the clean price minus interest owed to the buyer. Accrued interest = d2e d1 / 365 x g Clean price = All-in-price Accrued interest Note: i. Rounding convention: First take a clean price, round it to 5 decimal places and then take accrued interest then round to 5 decimal places and add back to the clean price to arrive at the all-in-price. ii. Bonds are considered to be cum-interest on a coupon date. In the example, above, the bidder would use the first formula, because the Stock the bidder wishes to tender for will mature in more than six months and the price will be cum-interest. This is because settlement takes place before
the closure of the register on the 14 th of June, which is one month before the next interest payment date. Substituting values into the relevant formula, the bidder s price would be calculated as follows: All-in-price = V1 d1/d2 { ½ g (a I n + e) + 100Vn i} Where: d1 = 96 d2 = 182 I = 13.5 V1 = (1 Vn i) / (I/200) = 0.9367681499 g = 12.0 n = 19.01991780822 ~ 19 ai n = (1 Vn i) / (I/200) = (1 0.2890747841) / (13.5/200) = 10.5322254212 e = 1 All-in-price = 0.9367681499 96/182 { ½ 12.0 x (10.5322254212 + 1) + 100 x 0.2890747841} = 0.9661325645{69.1933525272 + 28.90747841} = 0.9661325645 x 98.1008309372 = N$94.7784073729 per N$100 This price represents the present value of the expected cash flows of coupon payments (N$6 for each coupon payment) and nominal value (N$100) at redemption discounted at the desired yield of 13.50%. Accrued Interest = d2e d / 365 x g = 182 x 1 96 / 365 x 12.0 = N$2.8273972603 Clean price = N$94.7784073729 N$2.8273972603 = N$91.9510101126 per N$100
A1: rounding convention To arrive at the all-in-price on which the consideration is based, the following basic steps are employed in rounding the price. a. Clean price (N$91.9510101126) is rounded to 5 decimal places: N$91.95101 b. Accrued interest (N$2.8273972603) then rounded to 5 decimal places: N$2.82740 c. All-in-price = N$91.95101 + N$2.82740 = N$94.77841 B: Example: Price calculation for bonds with less than six months to redemption A bond with less than 12 months to maturity, becomes a money market instrument and for those with less than six months to maturity, a special formula is used to calculate an all-in-price. Let us consider a case where the GC05 is traded six months before maturity: Settlement date = 18 March 2005 Redemption date = 15 April 2005 Coupon = 12% Interest dates = 15 January 2005 Yield to maturity = 10.85 per cent Given this set of information, a price at which this bond will trade will be calculated using the following formula: All-in-price = (100 + e x g/2) / (1 + d1 /365 x I/100) Where: e = 0, because the price is ex-interest for the deal to take place after the closure of the books on the 16 March 2005 i.e., 30 days before the interest and redemption date (15 April 2005). g = 12.0 d1 = 28 I = 10.85 per cent Substituting this information into the formula: All-in-price = (100+0 x 12.0/2) / (1 + 28/365 x 10.85/100) = 100/1.0083232877
= N$99.1745417594 per N$100 Accrued interest = d2e d1/365 x g = 182 x 0 28/365 x 12.0 = N$0.9205479452 Clean price = N$99.1745417594 (-N$0.9205479452) = N$100.095089705 per N$100 B 1: rounding convention The correct all-in-price on which the consideration is based, is derived using the steps explained above in the first rounding convention example. a. Clean price (N$100.095089705) is rounded to 5 decimal places: N$100.09509 b. Accrued interest (-N$0.9205479452) then rounded to 5 decimal places: -N$0.92055 c. All-in-price = N$100.09509 N$0.92055 = N$99.17454 NOTE: It is, however, possible that a holder may lose an IRS certificate through theft or destruction. Please refer to Procedures for reporting lost certificate(s) and requesting replacement certificate(s) or payment at maturity. This document sets out the procedures that will facilitate the possibility of reissuing a new IRS certificate or receiving the payment for the face value at maturity when the certificate is lost, stolen, or destroyed. TABLE 1. INTERNAL REGISTERED STOCK (Interest Payments) Bond Books 1 st Interest Books 2 nd Interest Coupon Maturity type Closure Month Closure Month rate Date GC12 15 Mar 15 Apr 14 Sept 15 Oct 10.50% 15.10.2012 GC15 15 Mar 15 Apr 14 Sept 15 Oct 13.00% 15.04.2015 GC18 15 Dec 15 Jan 14 Jun 15 Jul 9.50% 15.07.2018 GC24 15 Mar 15 Apr 14 Sept 15 Oct 10.50% 15.10.2024 Taxation Section (16)(1)(I) of the Namibian Income Tax Act no. 24 of 1981 exempts interest income, received by or accrued to any person (other than a company) or any external company not carrying on business in Namibia, from TBs and IRS issued by the Government or any representative authority or local authority in Namibia. Capital gains are usually not taxable. However, should a taxpayer s activity of making capital gains be of such a nature that it can be construed as trading, it may be taxable. Determination of the taxability of capital gains should therefore be referred to Inland Revenue.