How to buy bonds, Start investing in FGN Bonds – Financengr
To invest in FGN Bonds is the way to go if you’re really in search of a risk free investment
How to buy bonds, a bond is a contract of debt with which an investor loans money to a borrower, usually Government or Corporate organization. The investor or holder of the bond is the lender.
When you invest in FGN bonds, you are lending money to a Government (Federal, State, Local Government Council, and Federal/State Agency) and Corporation, known as the issuer.
The Government uses the proceeds from the bonds issued to fund budget deficit or to fund infrastructure projects in the economy. When you purchase a bond, in return the issuer promises to pay you a specified rate of interest (the coupon) during the life of the bond and to repay the face value of the bond (the principal or the original amount invested) at maturity.
Should you invest in FGN Bonds, you should then ask What is Nominal Value of a Bond?
The nominal value of a bond is also known as the principal or the original or face value of a bond when it was first issued. It is the total amount upon which the issuer of the bond pays interest and is also the amount which must be repaid at the expiration of the tenor of bond, that is, at the maturity date.
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HOW TO BUY BONDS: What is a Coupon?
A coupon is the periodic interest (annual or semi-annual) which the issuer pays to the bond holders, which is generally fixed at issuance and expressed as a percentage of the bond’s face value. Hence, bonds are often called fixed income instruments.
HOW TO BUY BONDS: What is a Yield?
A bond yield is the amount of return an investor will realize on a bond or the current market interest rate for bonds. The yield of a bond is inversely related to its price, as the market price of a bond increases, the yield falls and vice versa.
HOW TO BUY BONDS: What does Yield, Dirty and Clean Price mean?
Yield, the market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond’s yield or rate of return. The market price of a bond may include the accrued interest since the last coupon date.
The price including accrued interest is known as the “dirty price”, while the price excluding accrued interest is the “clean price”.
HOW TO BUY BONDS: What is Maturity Date?
Maturity date is the day on which the issuer repays the principal amount or face value plus all outstanding accrued interests. The issuer has no more obligations to bond holders after repayment on the maturity date.
HOW TO BUY BONDS: What is Accrued Interest?
Accrued interest is the amount of interest that has accumulated on a bond since the principal investment or last interest payment date. For financial instruments, such as bond, interest is calculated and paid in pre-determined interval (annually or semi-annually).
HOW TO BUY BONDS: What is the difference between a Bond and a Stock?
The main difference between stocks and bonds is that stocks represent an ownership interest in the issuing entity while bonds are a form of debt in which the issuer promises to pay the principal amount at a specific date. Another major difference is that stocks pay dividends to the owners only if the issuer declares profit.
In the case of bonds, the issuer of a bond is obligated to repay the principal amount at maturity date and also pay interest to the bond holders at a set interval (annual or semi-annual). If you buy a bond and hold it to maturity, you know exactly how much you are going to get back.
That is why bonds are also known as ‘fixed-income’ securities. The buyer of stocks or shares in a company has purchased part of the equity and becomes part–owner. He is only entitled to dividend declared by the company when it makes profit.
HOW TO BUY BONDS: Types of Bonds
• Sovereign Bond (such as FGN Bonds)
When you buy FGN bonds you are lending money to the Federal Government of Nigeria for a specified period of time. The FGN Bond is considered as the safest form of investment 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 exempted from State and local taxes.
• HOW TO BUY BONDS: State and Local Government Council Bonds (Sub-National Bonds)
When you purchase State Government or Local Government Council Bonds you are lending to the issuers who promise to pay you a specified amount of interest and return the principal to you on a specific maturity date. Such bonds are usually backed by an Irrevocable Standing Payment Order (ISPO) guaranteeing deductions from the State’s share of revenue from the Federation Account into a Sinking Fund established for the repayment of the bond.
• HOW TO BUY BONDS: Government Agency Bond
These are bonds issued by Government agencies to raise money for financing of specific projects. These bonds do not carry the full-faith and credit of government. However, investors always hold them in high regard because they are issued by a government agency.
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•HOW TO BUY BONDS: Corporate Bond
Corporate Bonds are debt securities issued by the private sector. When you purchase corporate bonds, the corporation promises to return your money, or principal at maturity date, but you are being paid interest semi- annually. The interests you receive are taxable except there is tax exemption approved by the Government. Corporate bonds do not give you an ownership interest in the issuing corporation.
Are there Risks and Rewards in Investing in Bond?
Any time you lend money you run the risk that it will not be paid back – credit risk. Another source of risk for certain bonds (bond with call option) is that your money may be paid back before the maturity date, this is known as prepayment risk.
When you buy a bond, the prospectus will indicate whether a bond is callable. The risk for a buy–and-hold bond to an investor is rising inflation rate – inflation risk.
A rise in inflation makes prices fall and yields or interest rates to rise. However, inflation risk, credit risk and prepayment risk are all considered into the pricing of bonds, the more the risk the higher the yield. Investors demand higher yields for longer maturities, since the longer you tie your money up in a bond the more you are at risk.
Why should I invest in FGN bond?
Retirement Purposes. Starting or expanding a business. Settlement after apprenticeship. Pay children school fees in future(e.g for University education).Building a house or the development of a capital project.
Future projects by town unions, associations, student union. To fund future social events such as weddings, graduation ceremonies. Settlement of pension insurance obligation( for Corporate Fund Managers).
HOW TO BUY BONDS: What is the attractiveness/benefits of FGN Bonds to the investors?
It is a risk-free investment. The income earned (interest payments) are tax exempt. It provides relatively high and stable returns when compared to the conventional bank deposit.
The principal element, which is to be collected at maturity can be used as collateral for securing credit facilities from financial institutions such as banks.
Bondholders that want cash can trade the bonds on the floors of the NSE and FMDQ OTC Securities Exchange for immediate cash before maturity. It qualifies as liquid assets for banks in the estimation of their liquidity ratios by the CBN.
What are the benefits of FGN bonds to the Economy?
It fosters economic development by promoting the use of long-term funds for long-term investment in the economy. It serves as an efficient way of mobilizing domestic financial resources for productive investment in a non-inflationary manner.
It provides alternative source of funding to the Government, promotes self-reliance and reduce over dependence on external finance. It helps investors to diversify their portfolio and enhances stable return on their portfolio.
It serve as an efficient and effective way of mobilizing funds for infrastructural development with the multiplier effect of promoting economic diversification. It helps to facilitate financial inclusion. It promotes fiscal discipline of the Government.
It helps government funds its budget deficits in a non-inflationary manner by reducing resort to ways and means provided by the monetary authority to the Government. It provides benchmark yield-curve for pricing other debt securities/bonds.
It provides the basic infrastructure for the development of the financial system and the overall economy. It strengthens the implementation of monetary policy by the Central Bank of Nigeria. It enhances transparency, discipline and stability in the public finance management of the country.
Who are Primary Dealer Market Makers (PDMMs)?
PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds. Their major functions are to:
Take up, market and distribute the Primary Issues of FGN Bonds. Make markets in FGN Bonds on request, through the provision of continuous and effective two-way quotes to all PDMMs and non-PDMMs on demand and in all market conditions.
Who is Government Stockbroker?
A Government stockbroker is a broker appointed by the Federal Government to provide liquidity for FGN Bonds on the floor of the NSE so that investors, especially retail investors, who wish to buy or sell FGN Bonds can do so. The DMO appointed Stanbic IBTC Stockbrokers Limited (SISL) as the Government Stockbroker in 2012 to carry out the following functions:
Act as an intermediary between the DMO, NSE, Stockbrokers and other market participants to ensure that all activities in FGN Bonds, and other FGN Securities that may be listed in the future, are effected smoothly. Provide prices for FGN Bonds on the floor of the Exchange so that investors, especially retail investors, who wish to buy or sell FGN Bonds can do so.
Who are the Regulators and Government Agencies in the FGN Bond Operations?
Debt Management Office (DMO):
DMO is the Agency statutorily authorized by law to issue FGN Bonds on behalf of the Federal Government of Nigeria. The DMO also regulates the activities of the bond market and the Primary Dealer Market Makers.
Central Bank of Nigeria (CBN):
The Central Bank of Nigeria acts as the Issuing House and the Registrars for FGN Bonds.
The Nigerian Stock Exchange (NSE):
FGN Securities are listed and traded on the Floors of the Nigerian Stock Exchange mainly by retail investors.
Financial Market Dealers Quotation (FMDQ) OTC Plc.:
FGN Securities are listed and traded on the OTC Trading Platform of FMDQ mainly by wholesale investors.
Central Securities Clearing Systems Ltd (CSCS):
Acts as the depository of the bonds listed on the Nigerian Stock Exchange. Investors who opted for physical certificates at the issue must have their certificates deposited in CSCS before transactions on them on the floors of the Nigerian Stock Exchange and FMDQ OTC Securities Exchange.
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Securities and Exchange Commission (SEC):
The apex regulator in the Nigerian Capital Market; it regulates the activities of all capital market operators as far as operations and their transactions in the market are concerned.
What is Dematerialization of Bond Certificates?
It is a term which describes a shift from issuance of physical certificate to use of electronic entry to indicate the holding of individuals and enterprises in any bond issuance. It involves the use of a depository.
Although DMO still issues physical certificates on request, modern securities trading system de-emphasizes the use of physical certificates. Advancement in electronic communication and custodian services allow book-entry records and trade verification which has made trading more reliable and easier to manage than the use of physical certificates.
How can I be aware of the forthcoming Bond issues?
The DMO conduct Monthly Auction on behalf of the Federal Government of Nigeria and the notice is placed in National Dailies and the DMO Website, 7 days prior to the date. Quarterly FGN Bond Issuance Calendar is on the DMO Website. You can also consult your financial advisers for more information.
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