7-Step Guide to Investing in Nigeria Bonds

A bond is a contract of debt with which an investor loans money to a borrower, usually a Government or Corporate organisation. The investor or holder of the bond is the lender. When you purchase a bond, 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 of the bonds issued to fund budget deficits or 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. Bonds, especially government bonds, are considered the safest of all investments in the domestic debt market because they are backed by the ‘full faith and credit’ of the issuing Government, and as such, they are classified as risk-free debt instruments. They have no default risk, meaning that it is absolutely certain that your interest and principal will be paid as and when due. The interest incomes earned from the securities are tax-exempt.

Types of Bonds

Sovereign Bonds (such as FGN Bonds)

When you buy FGN bonds, you are lending money to the Federal Government of Nigeria for a specified period. The FGN Bond is considered 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 that your interest and principal will be paid as and when due. The income you earn is exempt from state and local taxes.

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.

Government Agency Bond

These are bonds issued by Government agencies to raise money for specific projects. These bonds do not carry the full faith and credit of the government. They are, however, highly valued by investors because they are issued by a government agency.

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, but you are being paid interest semi-annually. The interest you receive is taxable, except for a tax exemption approved by the government. Corporate bonds do not give you an ownership interest in the issuing corporation.

Why Governments Around the World issue Bonds

The Government issues Bonds for the following reasons:

• To finance government fiscal deficits in a non-inflationary and sustainable manner.
• To diversify government financing sources.
• To enhance fiscal discipline of the Government.
• To refinance maturing debt obligations of the Government.
• To develop and ensure liquidity in the domestic bond market on a sustainable basis.
• To enhance and deepen the savings and investment opportunities of the populace.
• To establish a benchmark yield curve, this serves as a reference for pricing bonds issued by other bodies, especially private sector issuers.
• To sustain the development of other segments of the Bond market.
• 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

Management of Bonds Issuance

The Debt Management Office (DMO):

The Debt Management Office of the country oversees the bond issuance process. The DMO is the agency statutorily authorised 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. Before the establishment of the Debt Management Office (DMO) in 2000, Nigeria’s public debt was managed by a myriad of government agencies in an uncoordinated fashion. This diffusion created systemic and structural problems that brought about serious strain on the country’s debt portfolio and economic growth. The establishment of the DMO marked the beginning of the institutionalisation and professionalisation of public debt management in Nigeria.

Central Bank of Nigeria (CBN):

The Central Bank of Nigeria acts as the Issuing House and the registrar 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 is listed and traded on FMDQ's OTC Trading Platform primarily 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 the floors of the Nigerian Stock Exchange and FMDQ OTC Securities Exchange.

The Securities and Exchange Commission (SEC) is 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.

Investing in Bonds in Nigeria? Your Step-by-Step Guide

Step 1: Choose the Right Bond Type

Before embarking on the investment journey, carefully consider your financial goals, risk tolerance, and investment horizon. Research the various government bond types available. In Nigeria, there are a couple of them that are open to both Nigerians and foreigners, such as FGN Savings Bond, FGN Sukuk, and FGN Eurobond.  Then determine which one aligns with your investment objectives.

Step 2: Identify Eligible Primary Dealers or Stockbrokers

Bonds are primarily issued through registered primary dealers or stockbrokers. These institutions act as intermediaries between the government and investors, facilitating the subscription process. Conduct thorough research to identify reputable primary dealers or stockbrokers authorised to handle various bond subscriptions.

Step 3: Open a Central Securities Clearing System (CSCS) Account

A CSCS account is a prerequisite for investing in FGN bonds. This account serves as a central depository for all Nigerian securities, including bonds. You can open a CSCS account directly with the CSCS or through a registered stockbroker.

Step 4: Obtain and Complete the Bond Subscription Form

Visit the website of the Debt Management Office (DMO), the agency responsible for issuing FGN bonds. Download the FGN bond subscription form and carefully fill out all required details, including personal information, investment amount, and desired bond type.

Step 5: Make Payment for the Subscription

Submit the completed subscription form along with the required payment to the designated primary dealer or stockbroker. Payment methods may vary depending on the institution but typically include bank drafts, cheques, or electronic transfers.

Step 6: Receive Confirmation and Allotment

Upon successful submission and payment, you will receive a confirmation from the primary dealer or stockbroker. The DMO will then conduct an allotment process to determine the final allocation of bonds to each subscriber.

Step 7: Monitor Your Investment

Once your bond allotment is confirmed, you will receive a certificate of holding. Regularly monitor the performance of your investment and stay informed about any developments or announcements related to the FGN bonds you hold.

Additional Tips to Investing Nigeria Bonds

Before making any investment decision, consult with a financial advisor for personalised guidance on investment instruments.

Review the DMO's website for the latest bond offerings, subscription procedures, and market information.

Utilise online resources and financial publications such as The Solutions Hub to stay abreast of bond news and market trends.

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FAQs

Why are Sovereign Bonds considered the safest form of investment?

Government bonds are considered the safest form of investment because they are backed by the ‘full faith and credit’ of the government. They have no default risk, meaning that it is virtually certain that your interest and principal will be paid as and when due. The income you earn is exempt from state and local taxes.

How lucrative is investing in Nigeria?

In the realm of financial investments, bonds stand as a pillar of stability and consistent returns. Among the diverse array of bond options available, FGN bonds issued by the Federal Government of Nigeria (FGN) have garnered significant attention as a secure and lucrative investment choice for individuals and institutions alike. This comprehensive guide delves into the world of FGN bonds, providing insights into their characteristics, benefits, and investment process.

What are FGN Bonds?

FGN bonds, also known as Federal Government of Nigeria bonds, are debt securities issued by the Nigerian government to raise funds for financing its infrastructure projects, budgetary needs, and overall economic development. These bonds represent a promise by the government to repay the principal amount invested, along with predetermined interest payments, within a specified timeframe.

What are the benefits of Investing in Bonds?

A Compelling Investment Proposition: Bonds offer a multitude of benefits that make them an attractive investment option. Security and Stability: Backed by the full faith and credit of the Nigerian government, FGN bonds are considered to be among the safest investment instruments in the country. Consistent Returns: FGN bonds offer fixed or floating interest rates, providing investors with a predictable stream of income. Capital Preservation: The primary objective of investing in FGN bonds is the preservation of capital, making them a suitable choice for risk-averse investors. Diversification: FGN bonds can effectively diversify an investment portfolio, reducing overall portfolio risk.

How can I secure my financial future?

In the dynamic realm of financial investments, FGN bonds issued by the Federal Government of Nigeria (FGN) have emerged as a beacon of stability and consistent returns. As the nation embarks on its path of economic growth and development, these government-backed securities offer investors a compelling opportunity to secure their financial future while contributing to the nation's progress.

Is bond investment a recession-proof investment?

Yes, some bonds are safe during recessions. Others, not so much. Bonds, which are loans from investors to corporations and governments, provide regular cash flow and a decreased chance of losing your initial investment.

How do I buy FGN Bonds?

Primary Debt Market: The FGN Bond Auctions Exercise is carried out by the DMO on a monthly basis. Primary Dealer Market Makers (PDMMs), empanelled by the DMO in 2006, are responsible for submitting bids for themselves and on behalf of their clients at the auctions. Secondary Debt Market: Trading in FGN Bonds is done daily in the secondary debt market by licenced broker-dealers (banks and stockbrokers) on the floor of the Nigeria Securities Exchange (NSE) and on the FMDQ OTC Securities Exchange. The PDMMs are obligated to provide a two-way quote for FGN bonds. This means that you can buy or sell your FGN bonds whenever the need arises.

Who are Primary Dealer Market Makers (PDMMs)?

PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds.

What are the functions of PDMMs?

The major functions of PDMMs 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.

What are the requirements to buy FGN Bonds?

Application forms can be obtained from any of the authorised dealers (PDMMs) or downloaded from the DMO's website. New FGN Bond Tender Form Complete the application forms and submit them through any of the PDMMs. A common-price auction system is normally employed as opposed to multiple-price auctions. Payments for the allotment are payable in full on application. Minimum of N50,000.00 and multiple of N1,000.00 thereafter.

Can I still invest in bonds if I miss the deadline?

Investors can also access the FGN bonds after the Auctions in the secondary market through any of the broker-dealers on the FMDQ OTC Trading Platform or through licenced Stock Brokers on The Nigerian Stock Exchange (NSE).

How do I know if my bond subscription was successful?

FGN bond purchases are confirmed by electronic registration in the Central Bank of Nigeria’s Scripless Securities Settlement System or by issuing certificates, where required.

How is the interest on my bonds paid?

Interest is paid semi-annually until the maturity date when the principal amount is repaid.

What if I don’t want my bond again or need to sell it for urgent cash?

Bondholders who do not want to hold the bonds until the maturity date can sell them at any time on the floors of the NSE or through the FMDQ OTC Trading Platform.

What is the value of a bond?

The nominal value of a bond is also known as the principal or the original or face value of the 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 that must be repaid at the expiration of the terms of the bond, that is, at the maturity date.

What is a Coupon?

A coupon is a periodic interest (annual or semi-annual) that 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.

What is the attractiveness or benefit of FGN bonds to investors?

It is a risk-free investment. The income earned (interest payments) is tax-exempt It provides relatively high and stable returns when compared to conventional bank deposits. 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 who 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 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 the maturity date and also pay interest to the bold 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 a part-owner. He is only entitled to dividends declared by the company when it makes a profit.