DEMYSTIFYING BONDS

Bonds are legal instruments used by Governments (Federal, State and Local), Companies and other entities to borrow money from the public.

The entity borrowing money by way of a bond is called the issuer and the person investing is the buyer.

The issuer of a bond promises to pay the buyer interest, which is called a coupon for the privilege of using the buyer's money. The issuer also promises to return the money, which is the principal to the buyer on a specified date. This is called the maturity date.

The coupon which, is a predetermined interest amount, is paid to the buyer at periodic intervals, throughout the life of the bond. It is this nature of known periodic interest amount (coupon) and known principal amount that gave rise to the nomenclature 'fixed income securities' given to bonds.

The bond market in Nigeria is evolving at a fast pace and is set to dominate the financial market before long. The bond market is at present predominantly made up of FGN bonds (98%). The balance is made up of State Government bonds.


Recent Development in the Bond Market

The Federal Government of Nigeria (FGN) through the Debt Management Office (DMO) has revived its FGN Bond market. DMO has appointed FSDH ( the parent company of CTSL) as a Primary Dealer/Market Maker in the FGN Bonds, alongside 14 other institutions.

The FGN bonds provide an attractive high-return and low-risk investment opportunity to banks and other institutional investors, as well as foreign fund managers interested in emerging markets. Many foreign fund managers are already taking advantage of these opportunities.

FGN Bonds are highly tradable in that:

  • They have high and stable returns (some have yield-to-maturity of up to 17% per annum for tenors up to 7 years)
  • They are free from default risk since they are guaranteed by the Federal Government of Nigeria
  • In Nigeria, the bonds have a unique quality in that they can be traded on the Nigerian Stock Exchange and can also be traded over the counter (OTC)
  • They are tax efficient as they qualify as Government Securities within the meaning of the Company Income Tax Act (CITA) and Personal Income Tax Act (PITA) for Tax Exemption

    • What FSDH can offer you

    Our status as a primary dealer/market maker allows us to participate directly in primary auctions. It obliges us to give quotes on bonds in the secondary market to you, our esteemed customer. The obligation to quote prices to customers on these securities, gives holders of the securities a ready and stable source of liquidity for the securities.

    We will be delighted to take your bid to the primary auctions and to offer quotes whenever such are required.

    For more information, please do not hesitate to contact our bond dealers on 234-1-2716280-3 and 234-1-2640150-9. We also welcome your comments, requests and questions on the FGN Bonds. You can e-mail us on folusanya@fsdhgroup.com and oosula@fsdhgroup.com


    FAQs on Bonds

    Why opt for FGN Bonds?

    If you are an investor looking at investing money for a period longer than 1 year, or tend to have deposits or placements that have been running for more than a year, FGN bond investment will likely suit your investment appetite.

    FGN bonds provide a desirable savings or investment vehicle for many reasons. They tend to be safer than stocks because if you hold bonds until the maturity date, you don't risk the principal. However if you need to sell your bond before its maturity date, you may lose or gain a bit depending on the ruling price at the point of exit. Without exiting prematurely, FGN bonds provide a regular, steady source of income (typically, interest payments are received every 6 months).

    Advantages of FGN Bonds are:

  • They pay higher interest rates than savings accounts.
  • They offer a relatively safe return of principal.
  • They often have less volatility (price fluctuations) than stocks, especially short-term bonds.
  • They offer regular income.
  • They are sold in small naira amounts (N10, 000.00).
  • They need less careful attention in management than other alternative investments.
  • They are exempted from federal income taxes and possibly from state and local income taxes.
  • They are a good way to diversify a portfolio and help to meet investors' income objectives.

    • What factors should I consider in buying bonds?

    1.      Investment Objective
    If your objectives are safety of principal and the ability to earn appropriate return on your money, Bonds are the ideal fit. For example, a N1 million 2-year 12% Coupon Bond, will return N120,000 to the investor every year if interest is paid annually (if interest is paid semi-annually, it will return N60,000 twice a year). At the end of the 2-year period, the investor will still get his/her principal amount of N1 million back.

    2.      Consider buying at different maturity levels
    When buying several bonds, buy at different maturity levels. This is known as laddering. For example, buy a 2-year bond maturing in 2003, a 3-year bond maturing in 2004, 4-year bond maturing in 2005, and a 5-year bond maturing in 2006. When the 2-year bond matures in 2003, buy another bond maturing in 2007. That way you will have a bond maturing in each year and if you need money, you should be able to sell from your portfolio, a bond whose coupon rate is comparable to rate obtainable in the market.

    3.       Diversification
    Bonds can provide diversification to an investor's holdings. Over the long haul, a portfolio consisting of stocks, short-term money market investments in commercial bills, and short-term deposits, can have its highs and lows evened out by Bonds, resulting in an overall higher return.

    4.       Bond Yield : Compare the yields of bonds to see the one offering best return.

    5.       Bond Risks
    For Corporate bonds, you should examine the risks associated with the issuer, consider how long it will take before principal amount is repaid (tenor to maturity), and determine if the coupon rate adequately compensate for identified risk (if any) and for inflation.

    How accessible is the FGN Bond?

    Every investor has equal access to invest in the FGN bonds. There are however two avenues through which such investments can be done (Primary or Secondary Market) Notices of primary issues auction are placed a week to the auction in most of the daily newspapers, informing the public about the various tenors of bonds available for sale. To participate in the auction, all that is needed is for you to fund your account with FSDH or any of the other 14 Primary Dealers/ Market Makers (PDMMs), and fill the bid form which can be downloaded on our website, or picked up at the offices of the various Discount Houses, Banks and Stockbroking firms. The bid can then be submitted through FSDH or any of the other PDMMs .
    At the secondary market, investment can be done by asking FSDH or any of the other 14 PDMMs for quotes (Bid & Offer) and once a favourable price/yield is available, deals can be sealed.

    How often can I participate at such auctions?

    There is no limit to how often to participate; the auction is open at advertised times for regular participation.

    How do I determine at what rate to Bid?

    At FSDH, any of our bond dealers will be willing to offer advice on market expectation and to give historical data on bonds in issue. The investor will finally make the decision regarding what rate to buy after evaluating available information.

    How long do I have to wait to know if I'm successful or not?

    Usually results are communicated a day after the auction and accounts are expected to be funded on or before the settlement date (which is two days after the auction).

    When/How can I redeem the bonds?

    Bonds are redeemed at maturity but can be sold at anytime through a Dealer such as FSDH.

    What is the minimum amount I can invest?

    A minimum value of N10,000.00 and multiples of N1,000 thereafter can be invested. An investment of a minimum value of N1,000,000.00 is however encouraged.

    How safe is my investment in FGN bonds?

    Investments in FGN bonds are classified as risk free. This is because the issues are based on the full faith of the Federal Government of Nigeria, and is charged upon the general assets of the Federal Republic of Nigeria.

    Is it possible to have my interest paid monthly?

    NO. Coupon payments are semi annual for now and as such interest is paid twice yearly.

    How do I receive my interest payments and principal amount at maturity?

    The Central Bank of Nigeria who is the Registrar for FGN Bond, post coupons to the address stipulated on the bid form or on the bond transfer form (where bond is bought from the secondary market). However, interest could be paid through an Authorized Dealer if that is one's desire. The Dealer is expected to credit one's account or draw a cheque in one's favor. Principal amount is received through the same way.