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

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.

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.

Wanna own a house?

Sometime ago, I spoke about investing in properties or the real estate as the sector is better known. I went in search of further information and came across the National Housing Fund. The National Housing Fund was signed into law by the Federal Government of Nigeria in 1992. Basically, the objective of this Act is to provide affordable homes to Nigerians irrespective of the income class. If you earn a minimum of N7,000 monthly, you can subscribe to this fund.

How does it work?

The National Housing Fund is administered by the Federal Mortgage Bank of Nigeria. If you are interested, locate the nearest FMBN branch within your state of residence and approach the officials. You’ll be required to remit 2.5% of your monthly income throughout your working life period into the NHF account. Interested applicant can pick up a form (free of charge), fill it and get your employer to sign their own respective parts. If you’re self-employed, you sign for yourself and also sign as the employer. Then you’ll be given a card which will record every payment you lodge into the NHF account.

The requirements of the NHF Act (1992) states that you can only use the fund for the following:

• Purchase a property
• Build a house
• Renovate existing property

Note that if the property you want to purchase is within your present state of residence, then it is advisable to open a mortgage account within that state. Once the loan has been approved, you’ll be responsible for the inspection and evaluation fees. It is also important that you remit 10% of the total value of the property you wish to purchase into the mortgage account you opened with respective primary mortgage institution.

Repayment Terms:

Interest on the loan is fixed at 6% per annum and to determine repayment period, deduct your present age from 60 years to know how long you will pay back.

Upon attaining 60 years, you’ll present your NHF passbook, a letter from your employer attesting that you have retired and a birth cetificate is also required which will be presented at the nearest FMBN branch where you’ll be paid back your NHF contributions over the years you were in paid or self employment. If you still need further clarification, do let me know.

Ramaddan Kareem

This is wishing my muslim sisters and brothers “Ramaddan Kareem”.

Investing in turbulent times

Hey, don’t go thinking I know all the answers cos I don’t. I am actually trying to discover what everyone is investing in amidst the global financial crisis. I spoke with a friend of mine yesterday and she suggested real estate. My grouse with buying land in Nigeria is the issue of  “Omo o nile” and attendant dubious charges. I would rather buy a detached three bedroom bungalow, within the range of N5mn – N6mn (which is dependent on whether I can access mortgage facilties), located in Lagos. Since I don’t have such huge funds right now, I have to think of something else.

For the past one month, I have been trying to scout for other alternative investment options (long-term), and someone had suggested ARM Investment. Please note that I did not include the link to the website. I’d rather not cos from my own point of view, either they are yet to engage the services of a social media strategist, or someone is simply not doing their job. I filled in the forms a month ago and I am yet to be contacted by a Wealth Advisor. What is the essence of setting up a website if there’s no one capable of attending to visitor’s enquiries. I also tried calling the numbers stated on the websites and unfortunately, none seems to be working.

My question today is: If you have some funds sitting idle in your savings account, where would you invest it?

Follow up To Retirement

I rarely visit the banking halls nowadays. Most of my banking transactions are conducted via the Internet and through the ATM machines at my local branch. I have not been to the banking hall for more than six months. If its’ imperative that I must go, it’s either I’m depositing money or probably making one or two enquiries. This has made life easier for me and also for a lot of Nigerians who conduct their banking transactions online. This has also led to multiple passwords and pin codes for the various cards that I carry in my wallet.

 After posting my article on retirement, I thought of what happens when a loved one passes on and his/her relatives do not have access to the passwords and pin codes to the bank accounts; what happens in such a situation? So, I ask myself if we’re creating more technological mess for our heirs when we die. I worked briefly in the banking industry and observed that 80% of the dormant accounts were a result of heirs or family members who are not aware of the various accounts the deceased had before his/her untimely death. Getting access to your financial accounts is imperative for your family members if you die, become incapacitated or you’re involved in a ghastly road accident that leaves you and your spouse either dead or paralyzed. Imagine what happens in the event of such a crisis where you find family members running helter skelter to raise funds and thereby incurring a huge amount of debt. For most families in Nigeria, the world virtually comes to a standstill when the breadwinner dies. Imagine what could happen; school fees will be left unpaid, neglected investment accounts could suffer losses, burial expenses will be incurred, financial accounts may never be claimed and the list is endless.Here are some of the things you can do to avert such a crisis:

·        Appoint an executor for your financial estate: this could be your brother, sister, parents or even your eldest child so long as he/she is 21years (this is the legal age in Nigeria). Your executor should have your current login password to your online accounts and computer, so that in the event of any sad occurrence, financial decisions can be made on your behalf. You should also make a list of all your assets, debts, mortgages (if any) and pin codes for any cards you may currently hold on an excel spreadsheet. Remember to password this particular file and leave the password in a place your executor can have easy access to.

·        Keep your financial documents safe: this includes your account numbers, online IDs and passwords, birth and marriage certificates, email IDs and passwords, pin codes, life insurance papers, will, trust deeds, certificate of occupation in a safe envelope and go down to your local bank branch and keep it in a safe deposit box. Also include answers to secret questions such as mother’s maiden name, your city of birth and your pet’s first name. The banks usually charge an annual fee for such a service. First Bank offers such a service. Also make extra certified copies of all documents relating to your financial estate and keep it in the your executor’s custody. Inform your executor where these documents are kept and of course, write a letter of authority to the bank or lawyer authorizing your executor to act on your behalf in the event of any mishap.

·        Keep your executor and children prepared: stash an emergency fund for such an event by making your eldest child or executor a joint signatory to the account, to keep things running smoothly till the details of your financial estate are sorted out.

Crash Retirement Programme II

• Change your budget: you need to have a zero based budget at this stage of your life. With a zero based budget, you start from absolutely essential expenses, then move to other less essentials until you arrive at zero. Sadly, many of us concentrate on less essential expenses while we burden ourselves with a lot of unnecessary financial burden such as extravagant burial ceremonies: wedding ceremonies: aso-ebi e.t.c. Cut all these expenses and plough the money into your retirement savings. You must change your habit at this stage of your life. Do not feel guilty when you say “No” to discretionary expenses.
• Change your job if necessary: this may not sound right to a lot of people, but remember we’re talking about a crash retirement programme. You don’t have the luxury of young age. Better job for this purpose could be the one that gives you a higher pay: the one that gives you more free time to do some personal business or a job that provides you with a better pension. These will help in quickly building your retirement fund.
• Go Private: while I don’t encourage you to utilize your present employer’s time for your private business, you must make a better use of all your free time. Think about starting a private business on the side to enhance your income. However, don’t cheat your employer. With a private business, you secure two sources of income for yourself. The good thing about this is that you can eventually retire into your private business and fight boredom on retirement.
• Retire Late: assuming you’re not cut out for entrepreneurship, you may consider retiring later than the standard retirement age. The longer you stay, the bigger your retirement benefit is likely to be. However, this is not the best option and in any case, your employer is not likely to retain you till the old age of 70 – 75.
• Mind your health: I can’t say this enough. You are not getting any younger. Mind what you eat and what you do at this stage. Medical expenses can be quite high for people in your category and it’s not advisable for this to erode your retirement savings. Take medical advice on time and remember prevention is better than cure.
• Be Realistic: when making your projections and assumptions, be as realistic as possible. Create a realistic dream for yourself. Why, for instance, would you want to ride a hummer jeep at retirement when your retirement fund can only afford a Honda City? If you can, go ahead. That’s what retirement is all about – good life. But if you can’t, why build a castle in the air?

  

Crash Retirement Programme

One of the few things people worry about is the future in terms of retirement especially if you’re five years from retirement. I wrote an earlier article on retirement giving an insight into what individuals can do to buy back a bit of the time they had earlier wasted due to ignorance and non access to relevant information that may assist such individuals.

How do you know if you’re eligible for this program? You’re eligible:

·        If you’re worried about your age. You’re most likely to check the mirror every morning to count the number of new gray hairs or wrinkles you acquired while asleep the previous night.

·        You’re concerned about the little assets you possess and continuously ask yourself “what can I do?”

·        You happen to be one of those who had lived a good life in the past, you could have additional emotional problem of self-blame. The common “if I had known” thought continuously haunt you.

If you’re in this position, all hope is not yet lost. Although there’s little you can do about your past, there’s a lot you can still do before retirement. This is not the time to berate yourself for what you did wrong or right. You need to take proactive action by doing the following:

Check your needs: you need to figure out what you’ll need on retirement and compare with what you will have in retirement. You also need to decide the sum that will be adequate for your living expenses by comparing what your present living expenses are right now. If there are some items that are not really necessary, this is the time to ask yourself if you can do without these items. Learn to differentiate between your needs and wants.  Also don’t count on whatever you may receive from your children in form of financial assistance cos this may not be a regular or constant assistance. It has always been an age long belief of many Africans that their children will take care of them in old age. Often, this is rarely the case.

Save! Save! Save: I can say this a million times. You must save every kobo and naira you can, however small. Let this become your daily chore. You are no longer 25, 30 or 40 years of age; retirement is now around the corner. Saving should be your priority. You can do this via Additional Voluntary Contribution to your Retirement Savings Account (RSA). Ask your employer to increase your personal contribution to 10% or 15%. It is no longer a case of convenience but that of compulsion. Let this be your new way of life even if you’re just entering the labour market. Your latter years will be spent in bliss and peace.

Assessing my goals for September

Last month, I did not give an update of my expenses and savings goal for the month. It was a rather busy month for me which included a lot of travelling for business meetings and other official functions. This month, I really won’t be dwelling a lot on my total networth. Rather, i’ll be giving an update on how effective I was in tracking my daily expenses and monthly savings. August was a bit flat for me especially in terms of my investments on the stock market due to the prolonged bearish run, there were a few dips here and there but overall, I held on steady. Remember, my investment goals are long-term not short-term.

For the month of September, I increased my savings goals from $1,134 to $2,591 due to a recent 40% increase in my annual salary (my organization has decided to include mid-year salary reviews as part of its’efforts in maintaining internal equities amongst employees) also received monthly cooperative check payments to my accounts; invested $2,540 in some public offers and private placements while my pension contribution earned an additional income of $979. To this end, I can begin to focus on my expenses for this month cos while my monthly income has been increased, this has also led to an increase in my monthly contributions towards pension which puts me in relatively healthy financial shape.

So, what are my goals for October? Reviewing my savings goal for the year which was a million naira, I’ve been able to save a bit more than a million naira by pruning down on my daily expenses. Right now, I’m saving towards my next vacation coming up February 2008 (I don’t have a specific destination in mind right now) but I’m working on it. I need a break to enjoy and spoil myself a little while seeing some wonderful sights around the world.

This month, i’ll be tracking my expenses a bit more closely by recording whatever I buy in my little notebook and also keeping all receipts so as to know where my money is going. Last month, I got off on a good start by tracking my expenses and keeping tabs on receipts but somewhere down the line, I lost track of all the receipts and couldn’t even locate some because Iwas not recording it in my notebook. Due to the recent salary increase, I also intend to increase my monthly savings goal from 70% to 80%.