Ugx 50 Million to Ugx 1.4 Billion: The power of compounding with Treasury Bonds Investments.

May 28 2024

Friends,

On June 12, 2024, The bank of Uganda is set to auction a 20-year Treasury bond - UG12L1806433, which presents another chance to invest in Capital Markets & grow your wealth. This Treasury bond boasts a good 15% coupon rate that predicts a roughly 16+% yield on Auction especially given that on the secondary market right now it commands a rate of 16.3% and also the last auction in May commanded a rate of 16.5%.

However, for today’s article, we will look at how you can leverage long term treasury bonds for wealth building and establishing long term Investment goals.

Investing in treasury bonds is one of the most smart and effective strategies to multiply your earnings by adopting a lower risk and minimal intervention method. With just UGX 1 Million as a starting point, you can invest in these bonds and start earning secure and stable returns of 15% per annum. This rate allows you to recover your initial investment within about six years, and subsequently profit for the following 12 years.

For tax purposes, be aware that these bonds only draw a 10% Withholding tax on all coupon interests.

Let's illustrate just how lucrative Treasury bonds can be.

Suppose you have UGX 25 million lying idle in your bank account. Investing this amount in the 20-year Treasury bond could earn you a neat 14% net return annually, equating to UGX 3.375 million post-tax. If this amount is invested back into the bond market at an interest rate of 15%, to take advantage of the compounding power, the total bond portfolio would grow to around UGX 314 million by 2043.

This only considers you investing back interest income you earn from the bond without investing back any more money from your other sources.

Let’s take it a notch higher. Assume each year, you direct an additional UGX 5 million into your bond portfolio. This strategy would grow your bond value from UGX 25 Million to over UGX 750 million on maturity. Few, if any, investments in Uganda today can yield such incredible returns over the long run, with the minimal risk attributed to Treasury bonds.

The assumption here is, every single year the Bank of Uganda pays you interest income, you invest it in long term bonds, while at the same time each year you add in an additional UGX 5 Million of your money in the bond portfolio and that extra addition would help grow your portfolio from the initial 25 million to over 750 Million UGX.

What about those with more Money, Say you currently have UGX 50 million? Capitalizing on this bond will promise you a net income of UGX 6.75 million annually.

Investing the coupon income back annually into the bond could see your bond portfolio grow UGX 640 million by bond maturity. The beauty of this investment centers on the discipline of playing the long-term game. Re-invest the coupons and Enjoy the power of compounding.

The Home-run strategy.

When you start your investment with UGX 50 million, which would help you earn around UGX 6.75 Million per year, then with the same strategy of reinvesting the coupon income back into long term bonds, then also committing to top up an extra UGX 10 million in the subsequent years, your bond portfolio could explode from the initial UGX 50 million to a staggering UGX 1.4 Billion after tax on maturity.

Even accounting for inflation and money value changes, you'd have amassed over a billion in total financial assets.

Now, if you have a CSD Account and are ready to Invest in the upcoming Auction, notify your custodial commercial bank and start the process. Fill in the CSD Form 2 as soon as possible to join in the auction. We have just 2 weeks to go.

Remember, Treasury bonds are relatively low-risk, offer fixed income via biannual coupon payments, and guarantee principal return at maturity. They are the perfect choice for investors seeking consistency, stability, and long-term returns.

Here's to your investment journey and financial growth. Happy investing!

Alex Kakande