Bond FAQs

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).

FGN BONDS
Fixed Income Instruments traded by the NGX
Difference between a bond and a stock
Risk and Reward in investing in bond

How can I be aware of the forth coming issues?

National Dailies
Debt management office Website - FGN bond Issuance Calendar

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 the Debt Management Office (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.

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 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 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 fixed income instruments are traded on the NGX

FEDERAL GOVERNMENT BONDS

Federal Government Bonds are the most liquid and capitalized bonds on the NGX. The Federal Government issues bonds in the primary market through the Debt Management Office at its monthly auctions and these bonds are subsequently listed on the Exchange for trading. These bonds are backed by the full faith and credit of the Federal Government of Nigeria and are semi-annual, coupon-paying bonds. Income earned on FGN Bonds is tax-free.

FGN SAVINGS BONDS

FGN Savings Bonds are a new initiative launched by the DMO in partnership with the NGX to give retail investors an opportunity to contribute to the growth and development of the nation. The FGN Savings Bonds are currently issued for 2-yr and 3-yr tenures and pay coupons quarterly. They are tax-free and are backed by the full faith and credit of the Federal Government.

STATE/LOCAL GOVERNMENT BONDS

State/Local Government Bonds are regarded as Sub-National Bonds and are issued by State or Local Governments usually to raise capital to fund projects in the state or municipality. Like FGN Bonds, these bonds are semi-annual coupon paying bonds and are backed by the State or Local Government issuing the bonds.

SUPRANATIONAL BONDS

Supranational bonds are issued by supranational entities which are formed when two or more sovereign nations with aligned interests unite to pursue a common agenda most often to promote economic development in developing or member economies. These entities often transcend geographical boundaries and have access to deeper pools of capital than would be available in the domestic market. They may issue bonds in the local currency of the domestic economy or may issue Eurobonds which are essentially bonds issued outside a country whose currency the bond is stated in. Supranational institutions sell their bonds on local markets of member countries and in the Eurobond market.

CORPORATE BONDS

Corporate bonds are issued by private and/or public companies. They usually have higher interest rates or yields than Government Bonds and are backed by the corporate entity issuing the bond.

GREEN BONDS

Green Bonds are bonds issued to fund projects that generate climate or environmental benefits such as renewable energy, sustainable waste management, sustainable land use (forestry or agriculture), clean water etc.

SUKUK

Sukuk refers to the Islamic equivalent of bonds. However, as opposed to conventional bonds, which merely confer ownership of a debt, Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risk. A Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia – Islamic religious law. Since the traditional Western interest-paying bond structure is not permissible, the issuer of a Sukuk sells an investor group a certificate and then uses the proceeds to purchase an asset, of which the investor group has partial ownership.

EUROBONDS

Eurobonds are essentially bonds that are issued outside of a country in which the currency of that bond is denominated. In modern times, Eurobonds have become synonymous with bonds issued in the international market and denominated in USD. Sovereigns, Corporates, and Supranational institutions may choose to issue Eurobonds to diversify their funding mix etc.

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.

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.