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

The Goldman Sachs Debacle

How many times in your career have you felt that the organization you work for has deviated from its’ core values by chasing profit instead of listening to its’ teeming client base. Take a moment to read through the following article generating interest on the web.

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.

 

 

 

Public Offers

Of late, we’ve been deluged with a number of public offers from the banking and other sectors. Quite a number of these organizations and institutions have painted a bright picture of their business performance. They’ve also gone ahead to give brilliant future forecasts.

My concern however is not with the number of public offers in the market, but how to separate the wheat from the chaff to determine the really good ones to invest in. My word of advice during this public offer bumper season is “Please really consult the advice of your stockbroker or your finanical analyst”. If you fail to do so, you may just find yourself incurring losses with equity investment.

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%.

$1.00 to N1.25 – How? What? When?

When I read the headline tagged “CBN restructures Naira”, I thought it was another impending macroeconomic policy aimed at reducing cash liquidity within the economy. It was when I read the story that the import of what the CBN is planning to do struck me. Since the news broke out, I’ve been receiving calls from my friends overseas who are wondering how this will happen and what impact it will have on our economy.

According to the governor of the Central Bank of Nigeria, this policy is aimed at reducing inflationary rates to single digit, reduce cash liquidity within the economy and restore the value of the naira to what it was in 1985 before the Structural Adjustment programme was initiated under the Babangida regime. What it means is that the CBN will be knocking off two zeroes from our current currency, higher denominated currency will be phased out while the highest currency note by next year will be N20.

So it got me thinking on how this will affect our lives as Nigerians. Does it mean that a loaf of bread currently selling for N25 will now be sold for 25kobo; pure water will be sold for 5k; will salaries be reviewed upward or downward to reflect the proposed new value; does this mean that a new car (Toyota) will only cost N20,000; the cost of buying a cow for social events will now be N500 against the old price of N50,000, what happens to housing rates? Will Landlords be willing to receive N5,000 for two years instead of N500,000? Does it mean if I have a bank balance of N1mn, I now have N10,000, what happens to the value of the stocks quoted on the Nigerian Stock Exchange?

Does it mean that it’ll now be cheaper to study abroad without necessarily cleaning out your account? Will a complete set of gold accessories be sold for N1,000 or less? Will it be cheaper to travel for vacations and summer trips? Does it mean for my current job role, I will be paid an amount that is at par with what my counterpart within the same job role in America is currently earning? Will it put a stop to incessant money spraying at social events? Will a basket of tomatoes be sold for N3.50k? Will it put an end to the long queues at the various foreign embassies where Nigerians are seeking greener pastures? Will it lead to increased foreign investments within the country? Will the cost of production be cheaper? Will fuel be sold for 7kobo? Will Nigerians abroad come back home or what? Will it reduce the moneybag syndrome? Will it increase the value of the naira within the African region? Will it?… Will it?… Will it?… endless questions you say…

These are some of the questions running through my mind right now. The Central Bank of Nigeria needs to embark on an awareness campaign to drive the import of this ongoing policy in the minds of the people. We must be carried along to ensure a successful implementation. 

 

 

 

 

 

 

My Networth – July

At the end of each month, I usually conduct an assessment for the previous months goal to determine if I surpassed my goals. Conducting a monthly assessment keeps me focused and determined to achieve my overall financial goals on my journey towards financial freedom. Besides, I’m interested in seeing my net worth increase on a monthly basis – it’s a great motivation. Last month my goals were as follows;

  • Increase my net worth by 3%.
  • Invest half a million in the stock market.
  • Commence a savings plan towards my proposed investment plans in the IBTC ethical fund.
  • Achieve a monthly living expense of N10,000 ( I live broke as if I was still an undergraduate).

At the end of the month, this is where I stand;

Net Worth (July)

Dollar Denominated

Assets

$

Current Account

8.00

Savings Account

1,245.14

Retirement Account

4,035.84

Stock Portfolio

44,877.26

Debts

14.79

Networth

44,862.47

Percent Change (%)

12.76%

Reviewing my set goals for the month of July, I surpassed the percentage target I set for the month, invested the stated amount in the stock market and achieved a monthly living expense of N10,000 while I’m yet to commence the savings plan for the IBTC ethical fund.

For the month of August, I’ve set in new targets;

· Increase my net worth by 5%.

· Open a separate account either with GTB/Intercontinental Bank; ensure it’s not linked to my ATM card (purpose: investment).

· Audit my monthly expenses to check if I’m spending money on unnecessary items.

· Continue to drive my monthly living expenses.

Fidelity, FCMB to raise N195bn from capital market

Fidelity Bank Plc and First City Monument Bank Plc will be hitting the capiatal market within few weeks to raise funds for the expansion of their operations.

While Fidelity is warming up to raise N100bn from the domestic market, FCMB plans to raise $750m (N95.25bn) from both the domestic and international capital market. Access Bank had only on Monday last week announced that it would shop for N70bn through a public offer billed to open this July.

Since the conclusion of the banking consolidation in 2005, Union Bank, Intercontinental Bank, Zentih Bank, First Bank and Oceanic Bank have accessed the market for additional funds.

The sharholders of Fidelity Bank will on Thursday approve an increase in the share capital of the bank from N10bn to N12.5bn by the creation of 5billion ordinary  shares of 50kobo each. Apart from increasing the share capital of the bank, the shareholders are also expected to authorise the directors to raise additonal capital up to N100bn.

It was learnt that the funds would be raised through a combination of convertible loans, equity or debt by way of private placement or offer for public subscription. FCMb said on Tuesday that a third of the fund would be obtained in London.

Guaranty Trust Bank Plc is currently selling global depositary receipts on the London Stock Exchange. The Chief Executive Officer, FCMB was quoted by Bloomberg News on Tuesday, as saying, “We have plans to raise another $750m of capital, primarily equity which will be followed by debt.”

“We expect that $250m of the entire capital raised will be done in the United Kingdom” by the end of this year.

The Nigerian Stock Exchange has made a deliberate attempt to build ties with the London Stock Exchange because investors  and analysts in the UK understand the country and are in much of the same zone.

About 40% of FCMB’s more than 100,000 shareholders are foreigners, including the George Soros’s Soro’s Private Equity Partners, UK-based Helios Investment Partners and the Commonwealth Development Corporation.