Personal Finance

Building Your Portfolio: Investing in Bonds

There was a story of a young lady who was orphaned at age 12. In her life, she never married, or had kids. She didn’t drive a car and lived most of her life in a one bedroomed house while working her whole career as a secretary.

Everyone who knew her knew she was a good lady, living a humble life. This was what made her charity donation of $7 million after her death (at age 100 years) quite the mystery. Everyone who knew her wondered and pondered… where did she get all that money? She had no inheritance, no properties to her name or even a will from what would have been her spouse!

There was no secret however. When the source of the donation was revealed, it took everyone by surprise. All she did invest a percentage of her salary consistently in the financial markets for 80 years, enjoying the fruits of hands off compounding. By the end of her lifetime, she became a multi-dollar millionaire. Her name was Grace Groner.

This story applies to any lesson in life, but especially when it comes to investing. Being consistent in your efforts to create wealth is paramount, but there is another lesson to be learned from Grace. Do not just save your income passively (i.e. in a savings account). You need to understand how the financial markets work in order to derive more return from your money.

And one of the best ways to ensure your money works for you is by investing in bonds. They are a safe way to grow your money and a very stable source of income, but before we get ahead of ourselves, let’s first understand what they are first!

What are bonds?

A bond is a fixed income instrument that represents a loan made by an investor to a borrower. In simpler terms, it is an agreement where one party loans another money in exchange for a fixed amount of cash every month until the end of the agreement, where the principal is returned.

Bonds can be issued by governments, companies and even municipalities. But more on this a bit later. Let’s get to know how exactly they work.

How bonds work

Take for example a government bond. They always make it sound so complicated in the business news section, but in essence it is just an agreement between an investor (which could be you or me) and the government (the borrower) where the government will borrow funds to build, for example, new roads or a railway (think of the SGR).

They will issue a bond, which is just a fancy way of saying they are looking for funds which you, (the bondholder) will give. Then in return, you will receive a fixed amount of money every month for giving them your money. This is known as interest on the loan and is based on an agreed upon an interest rate agreed upon by both parties. At the end of the period of the loan, you receive the original money (the principal), you invested in full.

Now every time you see new bonds being issued in the news, I hope you understand what it means!

Why invest in bonds?

  1. Fixed source of income

Bonds provide a monthly income based on the rate agreed upon at the beginning of the contract. So, for example, if you buy a KSh 5,000,000 government bond that is going at 10% per annum, you will earn a coupon of:

= KSh 5,000,000 *10%= KSh 500,000 per year

Or about KSh 42,000 per month.

That would be much higher than the 6% you get in a typical savings account that translates to only KSh 25,000 per month. Imagine being able to live off the interest alone and not having to touch your original investment!

  1. Relatively lower risk

Because the interest rate is fixed, you know how much you will get at the end of the period. Additionally, your principal (the amount you lent out) will be returned to you at the end of the loan term, meaning your investment is safe. You don’t have to deal with the wild price fluctuations of the stock market making it a much safer option.

Historically, bonds are known to be a safe option as the issuers are rarely known to default. Investees such as the government usually pay in full and on time as compared to companies which may or may not have the profit and or cash to pay dividends, so bonds clearly have that advantage here.

  1. Diversification of your portfolio

Diversification of your portfolio is basically balancing your higher risk assets with those that have lower risks and also ensuring that you are not overexposed to one particular sector or industry.

By investing in bonds, you might not be getting the high returns seen in the equity market, but you will be grateful for having them in case it takes a turn for the worse as you will have a stable source of income. Remember, interest will come in regardless of whether the economy is doing good or bad.

So we have seen the benefits of bonds, so how can we start investing in them. We’ll now look at how they are classified and then break down how to invest in each.

Categories of bonds in Kenya

In our local market, we have three main types of bonds you can invest in

  1. Treasury bills

These are the most common types of bonds available. They are medium to long term investments offered by the Central Bank of Kenya (CBK) that offer their payments typically every 6 months. Because governments rarely default on payments, they are generally secure and liquid as they are in high demand due to their predictable payments.

To invest in these, you need to open an account with the Central Bank of Kenya. This is called a CDS account and is similar (but separate) from the one that holds share accounts. First, you will need to open a bank account with a Kenyan Commercial Bank.

Once you have one, you will need to fill out a mandate card which can be collected from the bank in which you provide contact and banking information and have two signatories from the bank to verify the information you provide. Finally you will need to attach a passport sized photograph, stamped by your bank as well as a copy of your ID card or passport and you are good to go.

Once your CDS account is open, you are able to apply for advertised government bonds (you will see new issues in the newspaper or on their website). First, and most importantly, you will need to do your due diligence to find which type of bonds you are buying and how much coupon (the payment) to expect.

Then when you are ready to invest, you can fill out a Treasury bond application form which has all the details on the bond you want to purchase. Applications should be sent out to the Central Bank head office or branches by Thursday at 2PM for the 91-day, 182 day and 364 day bills.

You have the rollover option to easily facilitate re-investment, that is, to re-invest the coupon payments you receive to purchase further government securities.

You can find a sample application form for treasury bills and bonds here.

Finally, you submit your payments. You are now a bond investor! On the coupon dates, you receive your interest or it gets reinvested.

The minimum amount you need to invest in treasury bills is KSh 100,000 and incremental investments come at a minimum of KSh 50,000 which does put this out of reach for many, but there is a more affordable option which we shall discuss in a little bit.

  1. Corporate bonds

Instead of being issued by governments, corporate bonds are issued by companies. This means that the payment for the bond is backed by how well the company performs in the future or how well they can use assets bought by the loan to generate income.

Due to this factor, the risk of default is higher, so inherently they also have higher interest rates. Remember, the greater the risk, the greater the reward!

There is not a large market for corporate bonds in Kenya, so let’s take a look at an option with a more practical approach

  1. M-Akiba

Truly a feature of Kenyan innovation, M-Akiba is a type of bond that combines the overall safety of investing in the government, the affordable nature of retail bonds, as well as the next step in financial technology to increase access.

As it is mobile based, it allows anyone with a phone to invest in it and because of its low starting price (minimum investment is KSh 3,000), the financial markets are opened up to many more people.

This bond is used for infrastructure projects and the tenure is 3 years. When making payment for the bond and receiving coupons, you use your phone. The interest rate is fixed at 10% per annum and is payable semi-annually (after every 6 months).

M-Akiba is really where it’s at. It has the benefits of being secured by government and you really do receive your interest payments on time. If you do not have the millions to buy into government treasury bills this is a great option for you and this is how you can get started:

Registering for M-Akiba

  1. On your phone, dial *889#

A prompt will appear on your screen requiring you to enter your preferred Personal Identification Number (PIN). Set your preferred PIN then press OK to proceed.

Please note that for subsequent transactions, you will use the preferred PIN you entered the first time. You are advised to keep your PIN a secret and protect it against unauthorized persons. In an event you forgot your PIN, press 0 and follow the prompts to set a new PIN.

  1. Enter Your National Identity Number

The M-Akiba bond is open to Kenya’s citizens who have attained legal adult age of 18 years and are in a possession of a mobile money enabled phone, a duly registered line and a valid National Identity card.

  1. Register to Participate in M-Akiba

After entering your National ID number, you will then be prompted to register by dialling 1.

  1. Accept the Terms & Conditions of M-Akiba

The service will revert with terms & conditions of M-Akiba. You are required to read and understand the terms & conditions, if you are in agreement press 1 for YES.

  1. Successful Submission of Details

After accepting terms & conditions, you will receive notification from your network service provider informing you of your successful submission of details. You will then wait a few minutes for a confirmation message.

  1. M-Akiba Account Details

The confirmation message will have your M-Akiba Account Number, Your Name and the activation time & date of your M-Akiba Account. To continue trading, dial *889# on your line and follow the prompts.


Buying the M-Akiba Bond

  1. On your phone, dial *889#
  2. Enter your pin

Press 0 if you have forgotten your pin, follow the prompts to reset your password

  1. You will be presented with the following options:
  • M–Akiba bond
  • Trade bonds
  • My account
  • Exit

Choose option 1

  1. Select bond to bid on, i.e. M-Akiba (option 1)
  2. You will receive the bond details

                Name: M-Akiba

                Expiry date (dd/mm/yyyy)

                Issuer GOK

Select option 1 (buy) or 2 (more info) if you require additional information on the bond

  1. Enter the amount you want to invest

Minimum is KSh 3,000

Maximum is KSh 70,000

  1. Confirm amount (option 1)
  2. Wait for confirmation message with allocation results


It may seem a long process but it’s actually very simple and intuitive. Much like paying for groceries with M-Pesa.

So just to recap, investing in bonds is a low risk way to ensure you have a constant stream of income. It may not generate a high return as the riskier asset classes (such as shares which we shall look at soon), but they are a great way to ensure your portfolio is balanced, generates an income and hopefully gets you to a point of financial freedom.

I hope you have gained something from this post and are ready to start investing in bonds such as M-Akiba.

Thanks for reading and as always, happy investing!


New terminology

Bondholder- A person holding bonds issued by a government or company

Coupon- The annual interest payment that the bondholder receives from the bond’s issue date until it matures

Diversification- A way of managing risk in your portfolio by mixing a variety of investments, ensuring exposure to different asset classes, industries and geographical locations.

Issuing a bond- When a corporation agrees to receive a specific amount of money for a specific amount of time in exchange for periodic interest payments and eventual repayment of the loan

Principal- The original amount invested or lent out.

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