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Financial Markets

Revised Treasury Bill Auction Prospectus

1.0 DEFINITION OF TREASURY BILL

A Treasury Bill is a debt instrument issued by the Government in exchange for lending it money. It is a debt instrument, which matures in less than a year and which can be negotiated and traded freely in the market or rediscounted at the Central Bank as a last resort. As such, Treasury Bills can be used for financing temporary revenue shortfalls in the Government's budget. On behalf of the Government, the Central Bank may sell Treasury Bills, with a view to transferring spending power from the public to the Government. The advantage of this approach is that it becomes unnecessary for the Central Bank to print additional money to finance Government expenditure, thereby greatly reducing the inflationary effect of financing the government deficit.

2.0 ADVANTAGES OF TREASURY BILLS

As an investment instrument, Treasury Bills have the following advantages:

(i) Treasury Bills are secure. There is no risk of losing on the investment.

(ii) They are transferable and negotiable.

(iii) They can be pledged as collateral.

(iv) The rate of return is competitive.

3.0 MARKET SET - UP PARTICIPATION AND TENDERING

Beginning August 1993, the Bank of Tanzania launched an Auction market for Treasury Bills.

3.1 Presently, the Bank of Tanzania is issuing Treasury Bills for maturities of 91, 182 and 364 days through Auctions . Auctions are held every Wednesday at 11.00 A.M. in room 104, 1st floor, BOT Head Office, with a minimum bid size of TZS 500,000, and in multiples of 10,000 thereafter.

3.2 Individuals, groups or institutions are invited to participate in the Auction by placing their bids in the tender boxes located at the BOT's ground floor, 10 Mirambo Street.

3.3 The Bank of Tanzania will be advertising in the press four days in advance the dates, at which it will invite the public to submit their bids to the Auction. The notice will state the total face value of the Bills to be auctioned in each maturity.

3.4 Those interested in bidding may obtain application forms to purchase Treasury Bills from the Domestic Markets Department at BOT Head Office, and at BOT Branches in Arusha, Mbeya , Mwanza and Zanzibar ( see sample attached herewith ).

3.5 Investors can submit their bids at BOT Headquarters or at nearby BOT branches in Arusha, Mbeya, Mwanza, and Zanzibar.

3.6 Bidders should clearly indicate their names in full, together with complete address and phone / fax numbers if available.

3.7 The Auctions will be conducted on a multiple price system basis, and the successful bidder will pay the price s/he quotes for the amounts of Bills s/he wants to purchase. The procedure is intended to give the market more influence in determining the prices and yields, at which Treasury Bills are traded. The winners will be listed, starting with the highest bid price, down to the lowest bid price that exhausts the amount of Treasury Bills offered for sale. The Bank of Tanzania, reserves the right to intervene in any of the auctions and to reject any or all the tenders, without giving any reasons.

3.8 The results of the Auction will be displayed at the BOT Head Office Notice Board and at all BOT Branches. Also, a press release will be issued indicating the tender amount, the number of bids, the amount allocated, the number of successful bids, the highest and lowest price, the weighted average price and yield.

3.9 Individual results will be made available (confidentially), immediately after the Auction on request.

4.0 OBJECTIVES OF THE TREASURY BILLS MARKET

Treasury Bill Auctions are primarily intended to mop up liquidity in the economy, and thereby, reduce the inflationary pressure, promote the development of a money market, and to provide finance for temporary shortfalls in government revenue. The introduction of the Auction market for Treasury Bills is an integral element in the country's process of liberalising the economy.

5.0 INTEREST RATE AND INTEREST COMPUTATIONS.

As a guide to potential investors, please take note of the following formula to be used in calculating the interest (yield ) rate on Treasury Bills.

Interest rate =( F - P) x 365 x100
                        P             N  

where F = 100,

P = price per 100 shillings and

N = Number of days to maturity.

Examples for 91 - day, 182 - day and 364 - day Bills are:

The yield for successful bidders at the hypothetical price of 93.10 obtained for 91-days Treasury Bills at an Auction would be 29.73% p.a., the yield obtained by successful bidders at the hypothetical price of 85.79 for 182-days Bills would be 33.22% p.a., while the yield obtained by successful bidders at the hypothetical price of 73.50 for 364-days Bills would be 36.15% p.a.

5.1 The BOT redeems the Treasury Bills free of tax. The income earned will be calculated as the difference between the face value of the bill and its cost. Below please find examples for 91-day , 182-day and 364 days Bills.

5.1.1 For 91- day Treasury Bills let us assume a hypothetical face value of TZS 500,000 at a price of 93.10. If the investor was successful in a tender, he/she will obtain Bills worth TZS 500,000, although he/she paid only TZS 465,500. On maturity, the Bank of Tanzania pays the face value of the Bill, resulting in interest earned = TZS 500,000 - 465,500 = TZS 34,500.

5.1.2 For 182 - day Treasury Bills, assume a hypothetical face value of TZS 500,000 at a price of 85.79. If the investor was successful in the tender, he/she will obtain Bills worth TZS 500,000, although he/she paid only TZS 428,950. On maturity the Bank of Tanzania pays the face value of the Bill, resulting in interest earned = 500,000 - 428,950 = 71,050.

5.1.3 For 364 - day Treasury Bills, assume a hypothetical face value of TZS 500,000 at a price of 73.50. If the investor was successful in the tender, he/she will obtain Bills worth TZS 500,000, although he/she paid only TZS 367,500. On maturity the Bank of Tanzania pays the face value of the bill resulting in interest earned = 500,000 - 367,500 = 132,500.

_________________________________________

Sample of the Tender Form

Name (print).........................................

Address................................................

Tel. .......................................................

Date......................................................

The Governor,

Bank of Tanzania,

P.O. Box 2939,

 

Dar Es Salaam.

Dear Sir,

RE: TENDER FOR PURCHASE OF TREASURY BILLS

AUCTION NO................... TO BE HELD ON.........................

I/We hereby tender for the purchase of ..................91................days Treasury Bills worth TZS.....1,000,000/=..............................................(in words).....One million only............................................................................................................................................................................... at a price of TZS...........93.10..................per TZS 100.00.

I/W e undertake to pay the price of the bidded Treasury Bills upon receipt of your notification that this bid has been successful.

 

Yours faithfully,

 

.....................sign......................................

_________________________________________

 Sample of the Tender Forms

Name(PRINT)............................................

Address:......................................................

......................................................

Tel.No.........................................................

Date............................................................

Governor,

Bank of Tanzania,

P.O. BOX 2939,

 

Dar es Salaam.

Dear Sir,

Re: TENDER FOR PURCHASE OF TREASURY BILLS

AUCTION NO....................TO BE HELD ON.................

I/We hereby tender for the purchase of ................................................................................

days Treasury Bills worth Shs...............................................................................................

(in words).................................................................................................................at a price

of ....................................................................per Shs. 100.00 and in the denomination(s) indicated below:

 

* Denomination (for bids of TZS 50,000,000 and above.)

No.

Denomination (TShs)

Multiples

Total

1

 

 

 

2

 

 

 

3

 

 

 

4

 

 

 

 

 

Grand Total

 

 

I/We undertake to pay the price of the bidded Treasury Bills upon receipt of your notification that this has been successful.

Yours faithfully,

.........................................

* For each bid form the number of denominations should be based on the following range:

50,000,000 - 500,000,000 maximum number of denominations 4

510,000,000 - 1,000,000,000 maximum number of denominations 8

above 1,000,000,000 maximum number of denominations 10

In case of prorata, the number of certificates requested for should be issued in accordance with the amount allocated on prorata.

_________________________________________

6.0 PAYMENT PROCEDURE

6.1 Payment should be by bankers’ cheque only, drawn on the BOT – Domestic Accounts Department, P.O. Box 2939, Dar-es-Salaam.

6.2 Successful bidders are obliged to settle their bills within 48 hours after notification of the Auction Results at the Treasury Bill counter. Payments will, therefore be accepted from Thursday 8.30 A.M up to 3.00 P.M. Friday. Successful bidders will collect their certificates and other documents at the Treasury Bill counter 10 days after payment.

6.3 In case of non-compliance with the time limit for settling the bills, successful bidders will be disqualified from participation in the Auctions for a minimum period of one (1) month.

7.0 DISCOUNTING OF TREASURY BILLS

7.1 Premature rediscounting of Bills may be accepted at the discretion of the Bank of Tanzania, provided they mature within 180 days from the day of rediscounting by the Bank.

8.0 REDEMPTION

On maturity, Bills will be redeemed at the Bank of Tanzania Head

Office and the Branches by way of a cheque. Payment will be effected against the surrender of the certificates.

9.0 GUARANTEE

Under the Government Loans, Guarantees and Grants Act 1974, Part III on Local Loans, the Government of the United Republic of Tanzania has guaranteed all Government Securities, including Treasury Bills. The Act guarantees the Mainland Treasury Bills only and not SMZ.

10.0 ENQUIRIES CONCERNING FURTHER DETAILS SHOULD BE DIRECTED TO:

(i) Manager, Tel:G/L 110945-7

D/Line 114770/115128

Domestic Markets Department, Telex: 41024

Bank of Tanzania, Fax: 051-112537/112702

Dar-es-Salaam.

(ii) Branch Managers: BOT Branches in Arusha, Mwanza, Mbeya and Zanzibar.

Domestic Markets Department

Bank of Tanzania

April, 1998.

 

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