An evaluation of the use of the bond market by individual investors in Botswana

Abstract

To encourage investment the government of the republic of Botswana formally established Botswana Stock Exchange (BSE) in 1989 which is Botswana's national stock exchange given the responsibility to operate and regulate the equities and fixed interest securities market. The BSE continues to be pivotal to Botswana's financial system, and in particular the capital market, as an avenue on which government, quasi-government and the private sector can raise debt and equity capital. The extents to which the individual investors participate in the bond market are not clear and require assessment. This research seeks to establish the reasons why there are few individual investors to bond market as compared to other institutional investors such as banks, pension fund and the stock market in Botswana. The study used a survey with a respondents sample size consisting of four hundred (400) participants using judgment sampling. Data was collected by administering a questionnaire. Statistical Package for Social Sciences (SPSS) was used to analyze the primary data to achieve the objectives, and presented the data in tables, graphs and charts. The results indicated that most individual investors do not participate in the bond market when compared to other investment vehicles like Mutual funds, stocks, options, futures, forex, real estate and bank deposits. This is due to the bonds being in larger denominations which are beyond the reach of a common man. Bond markets encompass both government and corporate bonds. Municipal and Government bond are issued to finance budget deficits and they are sometimes tied to specific public sector development projects, moreover they depend on government financing needs as well as access to other sources of finance (e.g. donor funds). Even where both government and corporate bond markets exist, government bonds generally account for the majority of both market capitalization and trading activity (www.slideshare.net/econsultbw/2009) This dissertation concludes that economic factors lime bond price volatility, due to interest rate fluctuations, and inflation which in most cases affect long-term bonds may increase when government debt reaches an unsustainable high level. The implication is that the investors who want to achieve automatic diversification of their bond investments for less than it would cost to construct a portfolio of individual bonds can consider.