A bond is a contract between a lender and a borrower, whereby the borrower agrees to pay the lender interest and repay principal upon maturity.
FGN bonds are debt instruments issued by the Federal Government of Nigeria for an agreed period of time. The investor lends an amount of money to the government and earns interest on the investment until the maturity of the bond when the principal will be returned.
What are the benefits of an FGN bond?
1. Interest received on FGN bonds is not subject to tax.
2. Provides a stable income stream when held to maturity.
3. Repayment is guaranteed at the maturity of the bond.
4. FGN bonds can be used as collateral.
5. It is easily tradable as it is quoted on the Nigerian Stock Exchange and can also be traded over the counter.
Who can invest in FGN bonds?
Anyone can invest in a FGN bonds. They can be individuals or corporate bodies.
When are FGN bonds issued?
The government sells bonds via the Debt Management Office at a primary auction. Freshly issued bonds usually take place on the third Wednesday of every month.
What are the bond maturity terms?
FGN bonds have maturity years ranging from five to 10 or 20 years. The maturity of a bond is the number of years remaining for an already issued bond to be due for payment of principal.
Where and how do I invest in FGN bonds?
You can invest in bonds through a primary dealer/market maker. PD/MMs can be banks, investment houses, brokers etc. To invest, simply approach your chosen PD/MMs and fill a form including your personal information, bank details for payment of your interest, CSCS no?s, the amount you wish to invest, including your bid interest rate etc., and then sign. You can invest a minimum of N10,000 and multiples of N1,000 thereafter.
Why do I have to bid interest?
FGN bonds are sold via an auction system where investors quote interest rates for bonds they wish to buy. As such, bond applications with interest rates that are below the minimum average interest rates otherwise called the marginal rate quoted are accepted and those higher may be rejected. For example, if the marginal rate is 12 per cent, then bids below 12 per cent will be accepted. Therefore, different investors can have different interest rates provided it falls below the minimum average bid price. Someone can have 10 per cent, another 11 per cent, nine per cent, 10.5 per cent etc.
What is the marginal rate for bonds and how does it work?
Bonds are like any other financial assets and are affected by interest rate pressures. As such, despite the coupon rates, the FG indicates it will pay. Bond buyers and sellers determine the price of a bond based on its expected yield. For example, FG offers for sale FGN bond with a coupon rate of 10 per cent. Thus, N100 units (bond price) of the bond will earn N10 in coupon interest. However, when you buy, the marginal rate determines the price you pay. So, if the marginal rate is 13 per cent, you pay N76.9 for a bond with a face value of N100 per unit. This is derived by dividing the fixed coupon (N10) by the expected yield of 13 per cent (10/0.13) to arrive at N76.9. As such, the N10 coupon that will produce a yield of 13 per cent will be based on a price of N76.9. Basically, when the yield is higher than the coupon, the bond price is sold at a discount and when the premium is higher than the yield, the bond price is sold at a premium. The price or value of a bond is therefore determined by the yield.
What other factors affect bond price?
A. The credit status of the issuer.
B. Forces of demand and supply of such securities.
C. The inflation and interest rate movements.
Is there a secondary market?
You can buy or sell bonds in the secondary market. So, for those who do not wish to hold to maturity they can just go to the OTC market on the floor of the Nigerian Stock Exchange and trade.
How quickly can I convert bonds to cash?
If you do not wish to hold to maturity, you can convert bonds to cash by selling it on the secondary market through your PD/MMS.
When is the interest paid?
The coupon interest on FGN bonds is paid semi-annually (twice a year) and will be credited to the account that you indicated when you filled the form.
Can my interest payments be rolled over on top of the principal?
The coupon is not rolled over automatically. It is credited to your accounts as cash. However, you can then use the cash to purchase the next round of bond sales should you want to enjoy the benefits of compounding interest.