We are living in a country that cost of living is moving one way: Up, and despite all the gimmicks the authorities apply to show the drop in cost of living, one can not resist the pressure of high rising prices in commodities . An average person cannot afford the daily expenses he or she has to make with only by a monthly salary. If you have an extra source of income or a part time job, it definitely would be an advantage. Then on the other hand you cannot spend all your earnings on consumption; a considerable amount should be invested in a safer place for future needs. We at Lanka Help Magazine published several articles time to time on low risk Investment options in order to educate you and this is the latest of such an article.
BOC Debenture Issue
The State run banking giant Bank of Ceylon (BOC) is going for Debenture Issue of Rs.8 Billion commencing from 21st October 2013 to enhance its Capital Adequacy ratio, single borrower limit and to minimize the Assets and Liability mismatches. These Debentures are with face value of LKR 100 each that will be issued under nine categories. The tenor (maturity period) of this debentures are 5 to 10 years with attractive interest rates. In the three State Banks BOC, Peoples’ Bank and NSB, the published interest rate for a deposit of 5 years is 12.25% which is lower than the interest rates quoted for these Debentures.
Salient Features of the Nine Debenture categories
There are nine Debenture Categories and here is a description of the features of each of them.
- Type A : 5 Year fixed interest rate of 13% (AER 13%) Interest paid annually.
- Type B : 5 Year fixed interest rate of 12.6% (AER 13%) Interest paid bi-annually.
- Type C : 5 Year floating interest paid bi-annually. Floating interest rate would be 100 basis points above the weighted average six months Treasury Bill rate prevail at the end of every six months.
- Type D : 8 Year fixed interest rate of 13.25% (AER 13.25%) Interest paid annually.
- Type E : 8 Year floating interest paid bi-annually. Floating interest rate would be 100basis points above the weighted average six months Treasury Bill rate prevail at the end of every six months.
- Type F : 9 Year fixed interest rate of 13.25% (AER 13.25%) Interest paid annually.
- Type G : 9 Year floating interest paid bi-annually. Floating interest rate would be 125basis points above the weighted average six months Treasury Bill rate prevail at the end of every six months.
- Type H : 10 Year fixed interest rate of 13.75% (AER 13.75%) Interest paid annually.
- Type I : 10 Year floating interest paid bi-annually. Floating interest rate would be 125basis points above the weighted average six months Treasury Bill rate prevail at the end of every six months.
Basis of Allotment
Type A B C Debentures – Tenor 5 Years – 50%
Type D E Debentures – Tenor 8 Years – 15%
Type F G Debentures – Tenor 9 Years – 15%
Type H I Debentures – Tenor 10 Years – 20%
– LKR 10,000 or 100 Debenture is the minimum that you can invest.
Method of payment of interest
The interest will be paid by cheques, SLIPS or RTGS and you can select the desired method.
Benefits of Investing in Debentures
1. Attractive interest income throughout the investment period
2. Opportunity to realize capital gains on the fluctuations of interests in the financial markets.
3. You can exit any time from the investment
4. Can be used as a collateral (guarantee) to obtain credit facilities from Banks and financial institutions.
5. Tax benefits – Listed Debenture are exempted from income tax and withholding tax.
Risk factors associated with Debentures
As with any other investment there are associated risks in investing money in Debentures.
1. If an investor sells his debenture prematurely when the market interest rate is lower than the BOC Debenture interest rate he will incur a loss.
2. In the floating interest rates, if the 6 months T.Bill rate plus 100 and 125 basis points falls below the fixed rate of the Debenture the investor will get low income than the fixed income investor.
Please note that there are many risk factors involved in Debentures and we have noted here only the basics an average person would understand. The Fitch Ratings Lanka has issued the “ AA(lka)” rating for this debenture which can be interpreted as a low risk investment option.
The issues will be opened for subscription on October 21, 2013. Prospectus already delivered to the member firms and custodian banks so if you wish to invest please contact them for more details. You can also visit the Bank of Ceylon web site (www.boc.lk) where you can download all the necessary details (How to apply, Who can apply etc.) in PDF format.
We are happy to give you further clarification if you have any queries about this investment method. We would appreciates your comments and feedbacks.
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