Today’s article will serve as a guide to those who are interested about the financial instrument called BONDS, we will explain what they are, how one can buy them, their duration period, the features and most importantly, i will answer some questions that are asked concerning Bonds.
This is going to be a lengthy but interesting article, so I suggest you grab a bottle of coke cola, a book and a pen to write down some fascinating point, which you will need later as you invest in Bonds.
What are Bonds?
Bonds are financial instruments, which serve as a contract of debt, in which an investor, loans out money to a borrower. The borrower can sometimes be a division of a Government Body (local, state or national), corporate bodies, international organizations.
What that simply means is bonds are a way to lend out money to institutions or agencies and such lending is categorized as a contract
When you purchase a Bond, you are indirectly lending money to the borrower sometimes known as the insurer, which in our case will be the Government and this body of Government, might be the Local, State, Federal Government, Federal or State Agencies.
The Government uses the money gotten from issuing out Bonds to the public to fund budgets, infrastructure, projects, to offset deficit etc. The lovely part about purchasing Bonds is that, the issuer will promise to pay you a specific rate of interest also called coupon and as long as the Bonds remains active, you will keep receiving this coupon until the maturity period where you will receive the original amount invested or as we call it principal amount.
Since my audiences are Nigerians, I will focus on the country’s (Nigeria) Government Bond, which is called FGN BONDS; let us look about how this FGN BONDS works.
What are FGN Bonds?
The FGN Bond are debt securities (liabilities) of the Federal Government Of Nigeria (FGN) issued by The Debt Management Office (DMO), on behalf of the Federal Government.
When you buy the FGN Bonds, you are lending money to the Federal Government for a specific period of time, which can range from to 2-5 years or more, depending on the type of bond issued.
The FGN Bonds are considered as the safest of all investments, because it is backed by the “full faith and credit” of the Federal Government and as such it is classified as a risk free debt instrument.
They have no default risk, meaning that it is certain your interest and principal will be paid as and when due. The interest incomes earned from the securities are tax exempt- you do not need to pay tax.
Now that we have seen, what Bonds are and what FGN Bonds also are, we will explain the types of Bonds
Types of Bonds
There are various type of Bonds available in the financial market, though they differ from country to country, but for the sake of this article we will look at Bonds available for Nigerians by The Debt Management Office (DMO).
The sovereign Bond is also called THE FGN BONDS. The sovereign Bond can have different names, depending on the country it is being issued in. In Nigeria, it is called FGN Bonds. The country’s central (Federal) Government issues this Bond through an issuer, which in Nigeria is The Debt Management Office (DMO). These Bonds are exempted from taxes and are considered to be the safest form of investment.
The Sub-National Bonds is considered in Nigeria to be the State and Local Government’s Bonds and are issued by the states to fund projects. Such Bonds are usually backed by an Irrevocable Standing Payment Order (ISPO) guaranteeing deductions from the State’s share of revenue from the Federation Account into a Sinking Fund established for the repayment of the Bond, these bonds are not as famous as the FGN bonds.
Government Agency Bond
These are Bonds issued by Government agencies such as Nigeria Deposit Insurance Corporation (NDIC), Nigerian Tourism Development Corporation (NTDC), etc. to raise money for financing of specific projects These Bonds do not carry the full-faith and credit of Government, and investors buy them most times because they are issued by agencies back by the Government.
Corporate Bonds are issued by companies in the private sectors, unlike Sovereign Bonds, which are issued by the Government and have the full backing of the Government. The Corporate Bonds are backed up by the company’s ability to repay. These corporation promises to return your principal amount at maturity date, but you are being paid interest semi-annually. The interests you receive are taxable except there is tax exemption approved by the Government. Also note that Corporate Bonds do not give you an ownership interest in the issuing corporation
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Let us look at the various reasons why Nigerian should buy Bonds
Reasons why Nigerians should Buy Bond
There are many reasons why Nigerians buy Bonds and should buy bonds they are as follows:
This happens to be one of the reasons why majority of Nigerians buy Bonds. When you buy a sovereign Bonds (FGN BONDS) that has the full “faith and credit” of the Federal Government you receive your coupon which will accumulate over time and thus giving you income than to be spending your money or have your money stack somewhere else.
We all know that getting your pension can be hectic and difficult in Nigeria and which other way than to save money while you are young. Buying Bonds allow you to set aside money which will yield interest over the years and you do not need to worry about your retirement as you would have saved enough and do not forget that you will also earn interest from your principal amount.
Funding Of Social Event
Money use to fund social events such as weddings, anniversaries, birthday etc. can use to buy Bonds remember that these Bonds considered as the safest of all investments because it is backed by the Federal Government, and as such it is classified as a risk free debt instrument so you can use it to save you money while you earn interest and most social event happens once a year, giving you enough time to invest in Bonds.
Trying to save for a business or a start-up can be difficult as you will be tempted to use up your saved money for unnecessary expenses. But when you use the money to purchase Bonds especially long term Bonds it can help you to save, as you can keep buying the Bonds every month while having a fixed duration and this will aid you to earn interest while you save.
There are various reasons why people purchase Bonds and I have listen majority of the reasons though there are some reasons such as saving for your children’s school fees, projects for unions and association such as trade union etc.
Why do the Government Issue out Bonds?
The Federal Government of Nigeria issue out Bond through The Debt Management Office for various reasons. The Central Bank of Nigeria (CBN) might need liquidity in the Bond market to sustain the smooth flow of capital in the economy, or the Government might want to diversify their sources of finance to carry out various project which need capital. They sometimes issue out bonds to increase the investment and saving culture of Nigerians, also note that there are other reasons why Bonds are issued out excluding the ones I just mentioned.
How to buy Bonds
There are two ways to purchase Bonds either from the Primary Market or Secondary Market. Let us explain what these means.
The Primary Market
The Primary Market is the first place where a financial instrument is first offered or issued, in our case the Primary Market are where new Bond with full tenor (Bond duration period) are issued out.
How do you buy from the Primary Market you may be wondering? To buy Bonds from the Primary Market you will need to go through the Primary Dealer Market Makers also known as PDMMs. PDMMs are banks appointed by The Debt Management Office (DMO) to act as authorized dealer in FGN Bonds CLICK here to view a list of the PDMM institution.
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The Secondary Market
The Secondary Market is where financial instruments exchange hands from the sellers to buyers. This is done on a daily basis by licensed brokers or dealers such as banks and stockbrokers on the floor of the Nigeria Stock Exchange (NSE) or FDMQ OTC Security Exchange –this simply means that you can buy or sell Bonds whenever and where ever you are.
If you wish to buy Bonds through the PDMMs you will need to pass through these steps.
- Get the application form from authorized PDMMs or from DMO website.
- Bid for the coupon rate, this is similar to price auctioning and can be very confusing if you have not been following the Bond market, but do not worry as your PDMM can be of great help and assistance.
- Summiting your application form to the PDMMs –upon submission, you pay for the Bond and the minimum amount is N10, 000 and a multiple of ₦ 1,000 after that.
You can access your Bond or know the current value of it’s worth though your PDMMs or FMDQ OTC Trading Platform and also note that interest are paid semi-annually until the maturity date where the principal amount will be paid back. If you are worried about payment, you will be paid your interest and money invested (principal amount) directly to your bank account or thought cheque –depending on which you prefer.
If at any time you do not want to hold your Bond to the maturity period, you can decide to sell it through the Nigerian Stock Exchange (NSE) or via FMDQ OTC Trading Platform.
I have the tingling feel that for those of you, who have read this far might be confused, that is why I have decided to answer a few of your question.
Are There Risks In Bonds?
There are risks in everything in life including eating- have you heard about food poisoning before? The risk in Bonds solely depends on the type of Bonds, which you buy for example buying a Sovereign Bonds is less risky than buying a Corporate Bond. For the Sovereign Bonds the risks are equal or less than zero as the Federal Government will surely pay its debt.
Who Are The Players In The Bond Market?
There are just a handful of people who participate in the Bond market and they are the issuer (who ever issues out the Bond, it can be the Government or a Corporation)
- The Debt Management Office (DMO) is the second player and there role is to serve as the Government representative and agent, who appoint the PDMMs, broker, dealers in both the primary and Secondary Market.
- The Central Bank of Nigeria (CBN) serves as the bank to the issuer and manages the bid (price auction process).
- Primary Dealers Market Maker (PDMMs) are authorized institution who have the right to deal directly with any investor who wishes to buy the Bond, even if a stock broker want to buy the Bond on behalf of a client, they will need to pass through the PDMMs.
How Do I Know If FGN Bonds Are Issued?
Getting to know if Bonds are available for the public to buy is pretty simple and easy. If you read newspaper whether online or offline or follow online forum such as nairaland , you can always get information when a new bond is available for the public. You can as well visit the Central Bank of Nigeria’s official website or the Debt Management Office Website
How are Bonds Sold?
Well the minimum amount for the purchasing of Bonds is ₦ 10,000, Bonds are offered or rather issued in units of ₦ 1,000
In conclusion, Bonds are one of the best investments out there, which Nigerians can dive into without any fear of losing. It is a risk-free investment and the money earned are tax exempted- so you do not need to be worried about paying tax to anybody or to the government.
Unlike having your money stashed in a bank account or spend it on irrelevant projects you can decide to purchase Bonds which also aid in economic development, for investors with large capital , this can help to diversify your portfolio meaning, you can invest at numerous financial instrument all at once.
There are many reasons why every Nigerian should invest in Bonds, unfortunately I cannot write them all down it all down.
Please comment below if you have any questions or you need more information on Bonds also if you are already a Bondholder I would love to hear from you please comment below and share with your friends and family.