How to invest in bonds is one of the common questions I receive from readers. This information is available online on many finance-related sites or blogs, including the website of the Debt Management Office (DMO) which authorizes the issuance of FGN bonds. I want to continue to encourage those serious about their finances to do their homework by reading up on a subject they are not familiar with and ask questions thereafter rather than depend on a ‘guru’ to tell them everything they need to know.
Nobody cares more about your finances than you do, hence the right person to make decisions about your money are you, hence the need for financial education through self-study. Some have told me how they set out to buy treasury bills, for example, only to be talked into buying the bank’s in-house product instead. The account officer capitalized on the person’s ignorance to try and meet his target. This is what happens when you don’t do your homework.
About FGN bonds
Bonds are essentially loans, or IOUs, but you serve as the bank or lender. When you purchase a bond, you are lending money to a government, local government council, state government, a federal agency, or corporation, known as the issuer. Bonds issued by national governments are known as sovereign bonds. FGN Bonds are issued under the authority of the Debt Management Office (DMO) and listed on the Nigerian Stock Exchange. Essentially, the federal government is borrowing from you (typically to fund infrastructure projects) at an agreed rate, to pay back at a certain date in the future. The tenor is typically 5, 10, and 20 years. The way it works is that you will be paid interest only every six months (twice a year) and your principal will be returned to you at the end of the agreed tenor.
Many people are not aware of the fact that interest is paid twice a year throughout the tenor, hence when they hear 5, 10, or 20 years, they take off. They lose sight of the fact that this is a good way to save and invest long-term so that you will not be tempted to touch the money due to the long maturity period. Investing in bonds can be a good way to build your reserves or save for the future. You can invest the interest in bonds also, or other financial instruments.
Bonds are fixed-income assets but are not considered money market instruments due to the fact that the tenor is longer than one year. It essentially has the same characteristics as treasury bills, except it is long term and you get paid interest over the tenor, unlike the treasury bills where you are paid the whole interest upfront.
What are the benefits of investing in an FGN bond?
- It provides stable interest income.
- Your interest rate is stable over a longer period (5, 10, 20 years), which makes it easier to plan your future income. With money market instruments, you experience more rate fluctuations.
- Your interest is not taxed (tax exempt).
- Repayment is guaranteed at maturity. Governments hardly default in bond repayments.
- FGN bonds can be used as collateral for a loan. A savvy investor prefers to borrow from the bank rather than borrow from himself, thereby eliminating his reserve which is unwise.
- It is easily tradable as it is quoted on the Nigerian Stock Exchange and also over the counter (OTC). In essence, you can cash out before maturity by selling to someone else.
Are you qualified to invest in FGN bonds?
Yes. If you have a bank account, you can. If you don’t have a bank account, you can open one. You don’t have to be rich to invest in FGN bonds. You can invest in bonds through a primary dealer and market maker (PDMM). A primary dealer and market maker can be a bank or an investment house.
What is the process?
After you have made the decision to invest in FGN bonds, you can locate the list of PDMMs here: http://www.dmo.gov.ng/pdmmlist.php (you will need to download the file to view it). If your bank is not listed, you may be required to open an account with the PDMM.
FGN bonds are sold through a primary auction (those who invest in treasury bills will be familiar with the process). This auction usually takes place on the third Wednesday of every month. You will be given a form to fill, in which you will include your personal information, the amount you wish to invest and your bid rate (take a look at previous successful bid rates before deciding on your bid rate or you can go with the house rate provided by you PDMM). If you don’t have a CSCS account, you may have to open one. You will be guided through the process. You can invest a minimum of N10,000 and multiples of N1,000 thereafter.
What about the secondary market?
Like treasury bills also, there is a secondary market where you can buy ‘retail’. As stated earlier, bonds are tradable through the Nigerian Stock Exchange. Also, PDMMs buy FGN bonds to resell to customers. If your bid was not successful at the primary auction, you can buy from your PDMM. Also, if you are not willing to wait for the next auction or go through the ‘hassles’ of a primary auction, you can buy directly from your PDMM. Note that you will typically get a lower rate than going through the auction, as your PDMM adds a margin for his profit.
If do not wish to hold the bond to maturity, your PDMM can assist you to sell through the OTC market on the floor of the Nigerian Stock Exchange. This will be discounted, hence you are usually better of holding till maturity.
PS:
With effect from April 1, 2014, the list of Primary Dealer Market Makers in Federal Government of Nigeria Bonds licensed by the Debt Management Office is as follows:
1. Access Bank Plc
2. Associated Discount House Ltd
3. Citibank Nigeria Ltd
4. Ecobank Nigeria Ltd
5. First Bank of Nigeria Plc
6. First City Monument Bank Plc
7. FSDH Merchant Bank Ltd
8. Guaranty Trust Bank Plc
9. Kakawa Discount House Ltd
10. Stanbic IBTC Bank Plc
11. Standard Chartered Bank Nigeria Ltd
12. United Bank for Africa Plc
13. Zenith Bank Plc.
Feel free to ask questions or leave comments
Thanks a lot for this information before now I thought investing in treasury bills and FGN BONs are exclusive reserve of the rich.
Definitely, I will key into these as the federal government hardly renege on her financial promises.
God bless you.
You are welcome
I will like to invest in FGN BOND, was is the profit for a sum of 10,000.00 naira for a period of 5 years.
Ho Nicodemus, it is simple interest. If you put in a winning bid of 15% for example, that is 15% of N10k per annum which is N1.5k per year, over 5 years that will be x 5 (N7.5k).
You can decide how much you want to earn as interest, and build up the required principal. Most brokers accept minimum of N100k though
Hello Mr Usiere I really appreciate your writeup, as you said “You can invest a minimum of N10,000 and multiples of N1,000 thereafter.” what if I star with N10, 000 and before maturity I then sink another N7,000, does the interest come in the first 10k or 17k. How do the calculate the interest.
Thanks for this educative writing. Please how is the interest on FGN Bond paid ? Is it paid up front like NTB? Example for 5 year BOND,when is the 1st half years interest paid? Thanks
The interest is paid into the account your indicated while subscribing to the bonds (your account). The first interest is paid 6 months later, every six months (i.e. twice a year)