Investing in FGN Bonds

What are bonds? Bonds are simply a term for loans that you give to the Federal Government, State Government, Companies etc.

Is it a document or what? It’s simply a piece of paper issued by the Borrower (e.g the Government) stating the amount borrowed from you, the tenor (no of years with which to repay), interest rate, and repayment period

Why me? Can’t they go to a bank to borrow money? You because you may have some money that you wish to save. You may say you have just N10k to save a month from your salary and wonder how that helps the government. Imagine that there are 1million people with N10k to save, that transcends to N10b already. Also have in mind that the money the banks actually lend are money deposited by you and I. So you and I are the major source of money for government, banks, corporations etc. That is why they tax us, pursue us to open accounts, and pressure us to buy their goods.

What’s in it for me? Bond issuers (borrowers like the government) typically attach a coupon to the Bonds. Coupon are basically interest rates attached to the Bonds issues. For example, the Government can issue a bond for say N10b, 10year bonds at a coupon of 6%pa. What they mean is that they want to borrow N10b from the public and are willing to pay 6% interest rate for it per annum for a period of 10years. Usually they pay you the principal amount at maturity meaning at the end of 10years and sometimes they can have the option to “call back” which basically means the can pay you the principal before the 10 year period. Bonds with “Call Back” are always clearly stated in the prospectus.So, in a nutshell if you borrow them N10k, you form part of many others who must have lent them as well. They pay you N600 per annum and pay you the N10k a the end of 10 years.

What? Just N600? Yes just N600. Well, you may think of it as low but the if you put that same amount in a Savings Account of bank you’d probably get N200 and stand the risk of loosing it if the bank collapses. Besides if it is N1m you invest then that’s N60k every year, N10m is N600k and N100m is N6m per annum.

Are you saying Government Can’t collapse? Well technically they can but it’s very unlikely. Even if they do, it’s if there is a war but then they must repay after the war is over. Government bonds are mostly secure and are guaranteed by the full faith and credit of the Government.

So I have to wait for 10years to get my money back? Off course not. The beauty of bonds is that you can exchange them just like shares. You can decide to sell your bond on the bond market if you want your money back.

Oh, so I put in N10k and get my N10k back plus interest? Yes if you decide to hold to maturity and wait for 10years. But if you wish to sell before then you can except that it could be worth more or less. Just like shares the value of bonds go up and down depending on economic factors. So, the bond you bought for N10k may be worth N11k or N9k when you are selling it. Just like shares, today it’s up tomorrow it may be low. But at maturity (the repayment day) the government or borrower must pay you the face value. The face value is the N10k you paid them. Movement in the market does not affect what the borrower pays you.

So are bonds really like shares then? Not exactly, whilst both are investment securities they are different in their nature. When you buy shares, you buy right to earn a dividend of a company. Meaning that you only get dividends when the company decided to pay you. For a Bond, the borrower or issuer (that’s is the Government or company) MUST pay you interest (coupon) a the stated date. In other words, owners of shares are equity holders, whilst owners of bonds are debt holders.

I have often heard of yields, what is that too? Well yields are basically interest on traded bonds. In my previous illustration I explained that the government pays you a coupon of 6%pa on your N10k bond. Since we understand that bonds are tradable, supposing the value was 9k at the time you sell the bond. It then means whomever buys it will earn N600 on the N9k he paid out. Thus his actual interest otherwise called yield is 600/9000 = 6.66%. So he gains an extra .66% and still gets to get another N1000 if he decides to wait till the maturity of the bond. They often say the yield of a bond moves in opposite direction to the value. Just as above, as the value dropped to N9k the yield increased to 6.66%.

That’s cheating me isn’t it? Nah not true. Remember, there is an opportunity cost you may incur if you do not sell. Imagine you had a business that will probably get you twice that amount if you sell. So instead of holding on just so it gets to 10k or higher, you sell and use the money for something more tangible. Also remember that you would have collected some interest as well. And then you can simply just hold on till maturity, it all depends on your opportunity cost.

Ok now I get it! How do I then invest? Bonds can be purchased either through the primary or secondary market.

The primary market is were you buy bonds that have just been offered by the seller like the Government (just like buying a public offer). The secondary market is where you buy tradable bonds that is, bonds from the bonds market (just like buying shares in the stock market). Bonds traded in the secondary market are usually done on the floor of the Nigerian Stock Exchange or Over the Counter (OTC) through the PDMM

Bonds sold in the primary or secondary market are bought through a PDMM(Primary Dealer Market Maker). PDMM are operators licensed to buy and sell bonds. Most of them are banks like Zenith, GTB, UBA, Diamond Bank to name a few. They also have discount houses like Kakawa Discount House, FSDH who sell as well. You get the application form from them, fill it, include your cheque in full for the amount you wish to invest. You can invest as much as you can, from N10k to N1b depending on your capabilities financially. But the minimum is N10k and multiple of N1k thereafter.

The bonds purchased are confirmed through issuance of depository or issuance of certificates. The depository is the CSCS (Central Security Clearing System) an online storage for securities such as shares and bonds.

How do I get my interest? Interest on Government Bonds are paid Semi annually.For example in June and December or in January and July. Payment is through issuance of cheques or warrants, similar to the dividend warrants you get for shares.

Also note that interest rates can be fixed or floating. Fixed means when they say they will pay you 6%pa then it is 6%pa you get till the end if the maturity. Floating means they may pay you an amount that is linked to a are that moves with the market. For example they might say Nibor 8% plus 2%. Meaning the rate is benchmarked o. The Nigerian Interbank Official Rate (Nibor) of 8% plus 2%. The Nibor is a rate that banks use to lend money to each other and it always changes in response to market conditions and is thus the floating rate.

Source: Nairaland

Bookati Book Review

Ever wished your boss would drop dead?

 

Of course not. Well, not really. And neither had Rachel Benjamin—until she finds herself working for Wall Street terror Glenn Gallagher on his latest pet project. Rachel thinks the deal—and Glenn—are more than a little shady, but she has a promotion at stake. It’s either keep her lips sealed or kiss her partnership goodbye. Or kill Glenn. (Just kidding!)

 

At least she has Peter. Rachel’s too-good-to-be-true fiancé has moved in, and while his stuff is everywhere and he’s strangely jealous of her friendly new coworker, she’s confident they’ll figure things out. It would help if Glenn’s killer schedule didn’t have Rachel working around the clock. Really, the man must be stopped.

 

Rachel’s jokes about killing her boss don’t seem so funny when Glenn is murdered. And it’s even less laughable when she becomes the prime suspect. With the police hot on her very stylish heels, and the threat of an unflattering orange jumpsuit in her future, Rachel’s learning the hard way to be careful what you wish for. She needs to catch the true killer quickly, before the killer catches her.The Key

 

I was having my favorite type of dream, a flying dream, when the phone rang.

 

I opened one eye, testing to see if this was part of the dream. But in my dream the skies were blue and lit by golden sunlight. In my bedroom, it was dark, and freezing, since my new roommate liked to sleep with the windows wide open, even in March and even in Manhattan. And the phone was still ringing.

 

Peter mumbled something unintelligible and pulled the duvet over his head. I thought about doing the same, but surely nobody would call in the middle of the night unless it was important. I reached out for the phone.

 

“lo?”

 

“Rachel. Glenn Gallagher here.”

 

This had to be a joke.”What time is it?”

 

“Almost six. Listen, I need you in the office. We don’t have much time to get ready.”

 

“Ready for what?”

 

“I’ll tell you when you get in. See you in an hour.”

 

“But it’s Satur—” I began to say before I realized I was talking to a dial tone.

 

I was still half-asleep, so my reaction was somewhat delayed. It was nearly five seconds before I’d collected myself sufficiently to say the only appropriate thing that could be said in such a situation.

 

“You asshole!”

 

Peter gasped and shot into a sitting position. I’d spoken more loudly than I’d intended. “And a good morning to you, too.” Even in the dark, I could make out the silhouette of his sandy hair.

 

“You look like Alfalfa.”

 

“Excuse me?”

 

“From The Little Rascals. You know, the one with the piece of hair that stuck straight up. He sang.”

 

“I’m in the Mood for Love.”

 

“Uh-huh. He had a crush on Darla.”

 

“And that makes me an asshole? Get this hilarious novel for N1,000 at Bookati

MHQ Store – Lagos Foremost Online Food Store

Today I will be reviewing MHQ Store which offers Lagosians the ease of shopping without the associated stress of traffic. A colleague at the office referred me to the site based on the excellent customer service she received while ordering for foodstuffs and so I decided to give them a try.

So what did I order?

• Fresh Snails
• Cow Leg
• Crayfish (1 milk cup)
• Scent Leaves – Efinrin
• Ugwu Leaves – 2 Bunches
• Pack of Maggi Chicken
• Achi seed – 1 milk cup

Was it worth it? Oh yeah it was simply wonderful to sit at my desk and order for foodstuffs without going to the market. Immediately I placed my order, I received an email notification from MHQ and also got a call from customer service. For items I could not locate, I posted them in the comment box and also told them to deliver by 4p.m. They delivered by 5.30p.m which is understandable due to the recent traffic meltdown in Lagos.

I must commend the efforts of the owner (Bukola), the vegetables I ordered for N300 was a lot and the cow leg as well. I really got value for money on my foodstuffs. Oh by the way, there’s a delivery charge of N1,000 on your total purchase.

If you want to place an order, please click on the following link: Mhqstore

Have a fun filled weekend. Peeps I’m out.

The Wealth Myth

Over the past one decade, our attitudes and cultural beliefs about wealth has undergone a dramatic change. We have gone from people who’re proponents of hard work being the backbone of wealth to sudden riches overnight. These elusive lifestyle also comes with glamorous images of flamboyance. Today I’ll be discussing the false myths surrounding wealth.

• Life for the rich is a big party everyday: escapism from life’s’ daily worries does not exclude the rich. Irrespective of the economic divide we belong to as individuals, we all have our fair share of troubles and have to wade through them. If you read through the bio of accomplished men and women, a unifying factor is the hard times they waded through in reaching their goals.
• Once I hit the jackpot, I can buy anything I want: this is the biggest fallacy amongst the lot I’ve discovered. The rich don’t buy anything and everything, they carefully plan their purchases. Assuming you want to buy a car or build a house, you just don’t wake up one day and start. No! It all begins with the first seed and consistent savings.
• Whether you like it or not, hard work is the sure path to building wealth. Disregard all the music videos and movies that promotes easy wealth, popping champagne and throwing endless parties. Life does not pan out that way. Four years ago, i had taken the decision to buy a new car but guess what, I didn’t have the liquid cash to buy one even though I could have converted my stock holdings to do this. I felt it was not necessary and took a decision to save for the kind of car I wanted and could afford. I didn’t make that purchase till late last year when I knew I had the cash to make a one-time purchase. The key lesson here; plan, plan and work assiduously to achieve your goals.
• My current paycheck can’t take me far: hey wake up!!! The BRT lane was not built in a single day. No, No, No!!! When I started working, my monthly paycheck was average even though I had friends who earned thrice the amount I earned but that’s the beauty of ageing.

As you go along your career path, opportunities will come along that’ll increase your earning power. Remember the popular adage ‘little drops of water make a mighty ocean’. Start small and you’ll end big.

Spend less than you earn in 2012

If there is a single rule that underlies everything I’ve written about on Today’s Naira, it’s this simple sentence:

Spend less than you earn.

It sounds so simple, doesn’t it? Yet there are many people out there burying themselves in debt (spending more than they earn) or living purely paycheck to paycheck (spending exactly what they earn). Yesterday fuel subsidy was officially removed with a litre of fuel selling within a range of N138 - N200. This is an astronomical increase and it’ll require an effort to save in 2012.

Simply spending less than you earn has a cascade of positive effects.

First, you begin eliminating your debts. Spending less than you earn frees up the money you need to make larger payments on your debts. Over time, they begin to disappear, reducing your monthly bills and giving you even more breathing room.

Second, you begin to save. First, you build up some cash savings in your savings account, enabling you to roll through emergencies (like a car breakdown or a job loss). You’ll also have the breathing room to start saving for retirement, paving yourself a great future for your golden years.

Third, your stress level falls. Knowing that you have fewer debts, your emergencies are covered, and your retirement is being planned for reduces your stress level. You sleep better, your overall health improves, and you feel happier about life.

Finally, you are now able to explore possibilities closed to you before. When your debts are gone and you are spending far less than you’re bringing in, you suddenly have many more career possibilities. You don’t have to stick with your high-stress job – you have the financial freedom to move on and chase your dreams. You can live where – and how – you want to live.

All of that comes back to one basic principle – spend less than you earn.

That statement actually has two parts, though.

Spend less refers to the fact that you do need to cut your spending. The first step doesn’t need to be anything drastic – nor should it be. Many of the more extreme money-saving tips come from people who have already tried out the basic tips and love them, so they seek out more intense strategies to further cut their spending. I do this myself – I’m always trying out new money-saving strategies, discarding the ones that don’t work for me and keeping the ones that do.

Here are five big ways to get started.

First, go through every monthly required bill. Ask yourself if you really need that service at all. Do you really need to take your car to work everyday or could you start a car pooling service with colleagues who live nearby to cover the cost of fuelling the car? With the fuel subsidy issue, I forsee the era of filling up the tank eroding. Also, more people will become circumspect about fuel management. Then, go through each bill and see if there are any optional services you can eliminate. Do you really need a washman or consider the options of purchasing a washing machine and ironing your clothes yourself?

Second, keep diligent track of your spending. Keep a notebook in your pocket and write down every expense you have. The simple process of doing this will make you think twice about unnecessary expenses. When you do have a month’s worth of expenses written down, take a careful look at them. Ask yourself whether or not each of these expenses actually contributed to the value and joy of your life. That process will offer a lot of insight for you as to where your spending is going to waste.

Third, look carefully at your routines. Watch what you do every day (or most days). Are there things you do each day that cost money? Those things are the most powerful ones to adjust, as trimming just N100 from your daily spending saves you N36,500 a year. Do you stop at fast food restaurants each day? Why not cut down your daily order a bit,  or start bringing your breakfast or lunch from home? Do you splurge on Coke every day? Perhaps you can start considering making your own Sobo drink or Chapman twice a week. Look at every regular expense you have.

Great Advice

My next door neighbor had moved back in with his mom while he started his first job after college. He was hired as a broker for a small brokerage firm in Atlanta. Although he was ten years older, he became a mentor to me. He showed me the magic of compound interest and suggested that I start investing $25 dollars a month in a mutual fund. I could open a money market account to get started. He told me that I could become a millionaire by the time I was thirty-five. (He did the math and everything).

It was 1981 and I was only 14. Where was I going to get $25 a month? He convinced me to go to the local pizza joint and get a job…any job. I was hired at $1.00 an hour to bus tables in the evenings Thursday, Friday, & Saturday. I was to also get a tip share.

Two weeks later, my neighbor asked if I wanted to go to Six-Flags over Georgia. I told him I didn’t have any money. He asked, “Didn’t you get paid?” “Yes,” I answered. Then he asked me the million dollar question: “What do you have to show for that money? Show me what you traded your time and labor for.” He said he’d wait while I ran home to show him the “stuff” I’d bought.

I could only produce some trash. I had spent my first paycheck on frozen pizza, Cokes, and junk food when a buddy came over to spend the night. I felt humiliated and ashamed. My neighbor then said, “Always have something to show for your money.”

I did open those accounts. I have always lived on 80%. (10% to God, 10% to savings). I funded those accounts until I needed the money for college. (This was in the days before state sponsored lottery funded education.) It was a great lesson and one I have passed on to countless employees over the years. (I used to own several restaurants.)
- Dan

What do you have to show for the money that you earn? It’s a really powerful question to ask yourself.

Half- Year Appraisal

July 1 marked the second half of this year. What were some of the goals you desired to accomplish this year? It’s time to assess your success rates so far. I cannot stress the importance of saving for rainy days. Especially for women who deal with major financial crisis if anything happens to the breadwinner. Ensure the habit of saving 70% of your monthly salary (not lower than 50%) consistently and continously. The power of compound interest works on whatever amount you are stashing away right now. For a minimal sum of N10,000 you can invest in mutual funds managed by ARM Investment (a subsidiary of GTB). Other mutual funds managed by BGL Securities and First Bank Capital require a minimum of N500,000. Whichever way the cookie crumbles, you need to cultivate the habit of regular savings.

I’m a lover of leisure travel, clothes, culinary pleasures and shoes. However, I have not allowed my love for these things to deter me from imbibing a saving culture. I usually have a financial goal for the year which reads thus ‘ In 2011, I will save ……. by year end and invest in the following financial vehicles’. That’s how far I go and once I’ve made this committment, I adhere to my plans and until I achieve this goal, then there’s no travelling or any other pleasurable thing I indulge it. However, once I cross the mark, I whip out my pleasure list to decide what i’m indulging in. Overall, it must also fit within my budget or else I forgo and settle for something affordable.

In appraising your financial situation, you need to take into consideration how much you need to kick your saving gear in the right direction. Once you have a plan, stick to it and accomplish. In subsequent posts, i’ll be giving out information on the financial vehicles you can invest in.

Have a great year (2nd Half) ahead.

BiD Network – Women in Business

The sector competition organised by BiD Network opens today in its second edition. Women entrepreneurs can submit their business proposals for Africa, Asia and Latin America

Amsterdam October 20, 2010-
The Women in Business Challenge, a business plan competition to support women entrepreneurs in the development of small and medium sized enterprises (SMEs) in developing countries, is organized by BiD Network and made possible by its partners ING, ICCO, Plan Nederland and UnitedSuccess.

This competition starts today in its second edition. The first release, which was very successful, ran from October 2009 till January 2010, when five finalists were chosen from among over 200 business proposals.

Participants’ profile
Women, anywhere in the world, who want to start or grow an existing small and medium sized enterprise (SME) in a developing country. They seek finance in the range of US$ 10,000 and US$ 1 million. They either already have a full business plan or need help in developing their business plan. They have the ambition to grow the business in sales and numbers of employees. Plans will be accepted in English and Spanish.

For more information about the criteria and how to submit a plan click here

Prizes
This Challenge brings two prizes. For the five finalists a business trip to The Netherlands for trainings, b2b and investor meetings. For the absolute winner, tailor made advisory services worth €5,000 from UnitedSucces, the worldwide network for business women owners
All participants will receive feedback to improve their plan and may require for a coach to assist them in the writing of their business plan.
Whether or not a participant becomes a finalist, all high quality business plans are eligible for the BiD Network Investor Matchmaking Services.

Award Ceremony
The award ceremony will be hosted by Plan Nederland in the framework of the “Because I am a Girl” campaign, in the summer of 2011.

Time line
December 15, 2010: Deadline for submission of plan application
March 15, 2011: Deadline for submission of completed business plans
Finalists will be announced in June 2011.

• [ BiD Network ]marianne olano [ BiD Network ]Meenu Vadera [ BiD Network ]Willemijn Lammers [ BiD Network ]

  Women in Business Awards 2009-2010 -

  Winner Women in Business Challenge:
  Meenu Vadera – India 148767 Winner Women in Business Retail Prize:
  Marianne Olano – Philippines - 155437

   

 

One Thing to Do With Your Money Right Now

While we may not be able to tell how long the lull in the stock market will last, there are some things you can do to protect your financial future.

Hold More Cash

As always, when things get nutty in the markets cash is king. A healthy cushion in bank commercial deposits or money market funds will let you ride out the slump without having to sells assets at fire-sale prices. A cushion will also put you in position to invest when the downturn’s bottom is in sight — and that could come sooner than you expect.  Tread slowly if you do jump back in, though, and before you go bargain hunting first build your cash position to at least a year’s worth of living expenses, longer if you are retired.
Read more: http://www.time.com/time/specials/packages/article/0,28804,1856339_1856284_1856261,00.html#ixzz0w9MFuYEM

Financial Advice for Women

I have not written specifically about financial matters for some time now. I have been trying to discover other forms of investment since the CBN slashed fixed deposit rates. While watching T.V last month, I came across the advert regarding “Federal Government Bond” and how possible it is for an individual investor to participate.

I decided to find out more but it took me about four weeks to locate the website responsible for disseminating information.

What is a bond?

A bond is a loan and the investor or holder of the bond is the lender. When you purchase a bond, you are lending money to a government, local government council, state government, federal agency or a corporation, known as the issuer. The government uses it to fund budget deficit, for instance, or to build roads, electric power stations, finance factories, etc. When you purchase a bond, in return the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it ‘matures’.

What is FGN Bonds?

FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria issued under the authority of DMO and listed on the Nigerian Stock Exchange. The FGN has an obligation to pay the bondholder the principal and agreed interest as they fall due. When you buy FGN bonds you are lending to the federal government for a specified period of time. The FGN bond is considered as the safest of all investments in domestic currency securities market because it is backed by the ‘full faith and credit’ of the government. They have no default risk, meaning that it is virtually certain your interest and principal will be paid as and when due. The income you earn is exempt from state and local taxes.

The Government Issues Bonds for the following reasons

• To finance government deficits in a non-inflationary and sustainable manner
• To enhance fiscal discipline and for the management of monetary policies
• To restructure the existing debt stock of short term debt to longer term obligations
• To establish a benchmark yield curve, which acts as a reference for pricing other bonds issued by other bodies
• To develop the domestic bond market on a sustainable basis
• To enhance and deepen the savings and investment opportunities.

Expatiate on Special Purpose FGN Bonds

Special Purpose FGN bonds are bonds issued to meet specific needs of the federal government. For instance, following the approval of Mr. President, special purpose bonds were issued to selected banks for settlement of N75 billion pension arrears in 2006.  Five deposit money banks participated in the private placement arrangement. In addition, in 2006 FGN floated bonds for the payment of debt owed to local contractors worth N91.7 billion. Recently, FGN indicated interest to raise funds through bonds for funding specific projects such as Methanol plant, revival of textile industry, terminal wages of workers, building of infrastructural facilities, etc.

Nature of FGN bonds

• Denomination: minimum subscription of N10,000.00 + multiple of N1,000.00 thereafter

• Yield: – Interest payment

• • Fixed interest rates: Most FGN bonds have fixed interest rates which are paid semi-annually:
  • Floating interest rates: Some FGN bonds (e.g. 3rd & 4TH tranches of the 1st FGN bonds) have floating rates of interest which fluctuates around a reference rate(NTB rates) on the basis of specified parameters
  • There are also zero-coupon bonds(not yet in issue in Nigeria) whereby both interest and principal are repaid at the final maturity date of the bond

• Tenor: Minimum of two (2) years. There are bonds with maturities of 3. 5, 7 and 10 years, in issue and for the future we may have bonds with maturities of 15, 20,30 years or more

• Default Risk: FGN bonds as a sovereign debt are the safest investment instrument. Default risk is nil. The Government always pays what is due to subscribers on the agreed date.

How do I invest in FGN Bonds?

1. Application forms can be obtained from any of the authorized dealers(PDMMs), or download from the DMO’s website

2. Complete the application forms and submit through any of the PDMMs

3. Common- price auction system is normally employed as opposed to multiple price auctions

4. Payments for the allotment are payable in full on application

5. Minimum of N10,000.00 and multiple of N1,000 thereafter

6. Investors can also access the FGN bonds after the auction through the secondary market

7. FGN bonds purchase is confirmed by registration in the depository (CSCS) or by issue of certificates

8. Interest is paid semi-annually until the maturity date when the principal amount is repaid

9. Payment of interest is through issue of interest warrant(cheque) or direct transfer to current or savings bank accounts

10. Bondholders who do not want to hold the bonds until maturity date can sell them at any time on the floors of Nigerian Stock Exchange or Over the Counter (OTC), through, any of the PDMMs

Why should I invest in these Bonds?

Retirement

Starting or expanding a business

Settlement after apprenticeship

Pay children school fees in future(e.g for University education)

Building a house

Future projects by town unions, associations, student union

To fund future social events such as Marriages and weddings, etc

Settlement of pension insurance obligation( for Corporate Fund Managers), etc

For further information, you can visit the ‘Debt Management Office‘ through this link.