FAQ_Bond

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 the difference between a bond and a stock?
The key difference between stocks and bond is that stocks make no promise about dividends or returns, but when the Government Issue a bond, it guarantees to pay back your principal (the face value) plus interest. If you buy the 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’ investment – you are sure of a steady payback or yearly income.
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.

What are the types of Bonds?

When you buy FGN bonds you are lending funds to the federal government for a specified period of time. The FGN bond is considered as the safest of all the investments 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.

 When you purchase state and local government council bonds you are lending to the issuers who promise to pay you a specified amount of interest (usually semi - annually) and return the principal to you on a specific maturity date. State and local government bonds are debt obligation issued by the state government, local government councils and other governmental entities to raise money to build schools, roads, hospitals as well as other projects for public good.

These are bonds that help support project relevant to public policies, such as helping certain groups, such as farmers, homeowners, students, etc to raise money for financing specific projects. These bonds do not carry the full-faith and-credit of government. The investors are likely to hold them in high regard because they have been issued by a government agency.

Corporate bond are debt obligation issued by private or public corporations. The corporations use the funds for building facilities, purchase of equipment to expand the business, etc. When you purchase corporate bond, 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. Corporate bonds do not give you an ownership interest in the issuing corporation.

Are there Risk and Reward 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 loan may be paid back early, or ‘called’ this is known as prepayment risk. When you buy a bond, the prospectus will indicate whether a bond is callable and give you a ‘yield-to-call’ figure. The greatest danger 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-rise. However, inflation risk, credit risk and prepayment risk are all figured into the pricing of bonds. The more the risk the higher the yield. Investors demand higher yields for longer maturities, as the longer you tie your money up in a bond the more at-risk.

Why should I invest in FGN bond?
• 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

What is the attractiveness/benefits of FGN Bonds to the investors?
• It serves as risk-free investment
• It is income is tax exempt
• It provides relatively high and stable returns
• The principal element ( collected at maturity) can be used as collateral for securing credit facilities from banks
• Bondholders that want cash can trade the bonds on the floor of Nigeria Stock Exchange(NSE) for immediate cash before maturity
• It qualifies as liquid assets for banks from two years to maturity

What are the benefits of FGN bonds to the Economy?
• It fosters economic development by promoting the use of lon-term funds for lon-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 allows self reliance of the country by reducing over reliance on short-term borrowing form CBN & commercial banks
• It provides a basic infrastructure for the development of the financial system and the overall economy
• It serves as a diversified portfolio investment outlet to corporate and individual investors

What are the benefits of FGN bonds to the Government?
• It helps government funds its deficits in a non-inflationary manner
• It provides benchmark yield-curve for pricing other securities/bonds
• It engenders rational management of Government’s fiscal and monetary operations
• 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 introduces transparency, discipline and stability in the financial system

What is dematerialization of bond certificates?
It is a term which describes a shift from issuance of physical certificate to an electronic form. It involves the use of a depository, in this case, the Central Securities Clearing Systems Ltd(CSCS) which provides the platform for the securities.
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 forth coming issues?
• National Dailies
• DMO Website -  FGN bond Issuance Calendar

 

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