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Q. What is competitive and non-competitive bidding?
A. Individuals bidding competitively state the amount of the bond required and the highest price which they are willing to pay for the bond. However, if their bid is below the price determined by the auction process, competitive bidders will not be allotted any bonds. In the case of a non-competitive bid, the buyer states the amount required (up to a limit of $100,000) and agrees to accept the cut-off price determined by the auction process.
Q. How is the cut-off price determined?
A. The total amount of non-competitive bids is set aside then the competitive bids are arranged by price from highest to lowest. Bids are accepted starting with those which have the highest price until the bond is fully allocated. The last price that allows the bond to be fully allocated is called the cut-off price. This price is paid by both successful competitive and non-competitive bidders. The cut-off price can be higher that par value, which is termed a premium, or can be lower than par value, which is termed a discount. The entire process takes place automatically in a computerized system.
Q. Do I get a bond certificate as evidence of purchase?
A. No. Previously, a paper bond certificate was issued. However, while this provided bondholders with tangible evidence of ownership, there was a major disadvantage in that it made the sale of the bond difficult. This is because the process of changing the paper certificate to the new owner was lengthy. Bonds are now being issued in electronic form, that is, ownership is registered on an electronic system with the Registrar which is the Central Bank.
The Registrar provides bondholders with periodic statements of ownership. This system allows any changes in ownership (for example, if the bond is traded before maturity date) to take place quickly and safely. The new arrangement therefore provides more flexibility to bondholders.
Q. What are Government Securities Intermediaries?
A. Government Securities Intermediaries (GSI) are financial institutions which act as the Bank’s counterpart in auctions of government bonds. They undertake to purchase the bonds from the Central Bank either on their own behalf or on behalf of the public. These GSIs have also undertaken to provide a secondary market by buying and selling government securities.
Q. What are the benefits and risks of purchasing government bonds?
A. One of the many benefits of buying a government bond is that it is generally the safest form of investment since the possibility of a government defaulting on its repayment is very low. In fact, the obligations of the Government of Trinidad and Tobago meet internationally recognized investment grade standards. Few entities can boast of this status. Inclusion of such an instrument in a portfolio reduces the overall risk of an investor’s local portfolio because of the rating of the bond.
Since the terms of the bonds are medium- to long-term, individuals as well as institutions find it convenient to match certain expected expenditures (example for education, retirement, capital projects, etc.) with the maturity dates of these bonds. Government bonds pay interest half-yearly; holders have access to an income stream over the life of the bond.
Commercial banks also allow the use of Government of Trinidad and Tobago bonds as security for individuals and institutional borrowing. The major risk with government bonds, as with all other bonds, is that if holders want to sell them before they mature, this must be done at the market price. The market price may have moved up or down since purchase, depending on market interest rates. However, if the bond is held to maturity, the bondholder will receive the full amount of the investment.
Q. Where can I get information on a government bond?
A. Information on government bonds is available from Government Securities Intermediaries and/or Registrars. Moreover, for each bond issue, the government appoints a Trustee who is responsible for looking after the interest of bondholders. The name of the trustee is identified in the Bond Information Memorandum when the bond is being issued.