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?