Investment in BONDS

[ghm]

In the last couple of years, there has been a wave of awareness in stocks and shares investment and many people have taking advantage of this to increase their knowledge base and participate. (I am one of them).

However, I know little or nothing about Investment in BONDs in Nigeria

BONDS
What are they?
What types are available in Nigeria?
Any Advantage/Disadvantage over Stocks?
What are the things you need to know before dabbling into it?

Kindly contribute your tit-bits as we increase our knowledge in this type of Invesment and become participants and not just on lookers.

[ghm]

My good people,

Are you saying that we are only experts on stocks and shares and not in BONDs just like myself. The topic became interesting to me because there were so much about them sometimes last year...

[Stockbear]

@Ghm

I am baffled just as you are, there are many topics that I hoped the admin would help guide/direct but many threads/questions go unanswered, I wonder why?

[ghm]

INVESTING IN BONDS
Overview
A bond is an “IOU” issued by either a government or a corporation. Therefore, investors in bonds are essentially lending money to the issuer (government or corporation). There is wide range of bonds, as we shall discover in this piece. Depending on your goals, your tax situation and your risk tolerance, you can choose from municipal, government, corporate, mortgage-backed or asset-backed securities and international bonds. Within each broad bond market sector, you will find securities with different issuers, credit ratings, coupon rates, maturities, yields and other features. Some of the numerous types of bonds and their features are discussed below.

TYPES OF BONDS
There are different types of bonds issued for trading by different organizations and governments and quasi-governmental institutions, each class of bonds with its unique features relating to the way it pays interest, the market in which the bond is issued, the currency it is payable in, protective features and their legal framework under which it operates. Bond Issuer may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category.

Corporate Bonds
Corporate bonds are debt obligations issued by private and public corporations. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to business expansion to capital restructuring.
Bond investors lend money to the corporation that issued it with a commitment by the corporation to return the money, or principal, on a specified maturity date. In addition, the corporation pays the bondholder stated rate of interest, usually semiannually. The interest payments received from corporate bonds are taxable. Unlike common stocks, bonds do not give the investor an ownership interest in the issuing corporation. However, in the even of bankruptcy, bondholders as well as stockholders can make a claim to the corporation's assets. In Bankruptcy proceedings, bondholders generally receive priority over stockholders.
Corporate bonds are issued by blue chip companies and can be grouped into several categories based on the sector in which they operate such as real estate and manufacturing bonds. Industries with stable revenues and earnings are called "noncyclicals", where as, those whose revenues and earnings rise and fall with the economy and commodity prices are called "cyclicals". Most corporate bonds are debentures—that is, unsecured debt obligations backed only by the issuer’s general credit and the capacity of its cash flow to repay interest and principal.

MUNICIPAL AND GOVERNMENT BONDS
Municipal bonds are debt obligations issued by states, cities, counties and other governmental entities to raise money to build schools, highways, hospitals or any other projects for the public good. In advanced countries, quasi-government related institutions like federal agencies issue bonds which are often supported by the revenues of the institutions involved or guaranteed by the government, thereby ensuring the safety of the investment. A major benefit of municipal bond, which makes it attractive to small investors, is that it is often free from state and local taxes in the state in which they are issued.

FOREIGN BONDS AND EUROBOND
Foreign bonds are issued by companies outside its country of domiciliation. For instance a Nigerian company can decide to raise capital by offering bonds in South Africa. Any firm that raises money from abroad is subject to the rules of the country where it does so. A Eurobond is a bond that is sold simultaneously in different countries and is facilitated by an international syndicate of underwriters located mainly in London. The underwriters include mainly, London branches of foremost investment and commercial banks in the world.

ASSET BACKED BONDS
These are bonds that are based on pools of underlying assets. These assets are usually illiquid and private in nature. A securitization occurs to make these assets available for investment to a much broader range of investors. The "pooling" of assets occurs to make the securitization large enough to be economical and to diversify the qualities of the underlying assets. In the event a corporation goes out of business or defaults on its debt, bondholders, as creditors, have priority over stockholders in bankruptcy court. However, the order of priority among all the vying groups of creditors depends on the specific terms of each bond, among other factors.

BENEFITS OF INVESTING IN BONDS
Good yields: Bonds provide steady income at regular intervals, which come in the form of interest. However, corporate bonds usually offer higher yields than comparable maturity government bonds. It should however be noted that the high-yield potential of corporate yield is generally accompanied by higher risks.
Flexibility: Bonds market is often very liquid and big, providing opportunities to sell easily and quickly even before maturity. Dependable income: People who want steady income from their investments, while preserving their principal, include bonds in their portfolios.
Safety and Reliability: Government bonds are long-dated risk free instruments. Similarly, corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating, the safer the investment. Diversification: Bonds provide a wide range of investment instrument each with its unique features and opportunities cutting across sectors, structures and credit-quality characteristics to meet different investment objectives.

WHO CAN INVEST IN BONDS?
Most corporate bonds trade in the over-the-counter (OTC) market. Most bond market does not exist in a central location. They are made up of bond dealers and brokers from around the country who trade debt securities over the phone or electronically. Market participants are increasingly utilizing electronic transaction systems to assist in the trade execution process. The OTC market is much larger than the exchange markets, and the vast majority of bond transactions, even those involving exchange-listed issues, take
place in this market. Investors in bonds include large financial institutions, such as banks, insurance, managed funds, pension funds, endowments, and mutual funds. Also Individuals, including low and high-income earners can also invest in bonds.
Maturity
One of the important features of any investment is the maturity or tenor of holding. Bonds, by their peculiar nature are a long term investment which naturally exceeds one year. A bond’s maturity refers to the period when the investor can have his principal back and how long he can expect to receive interest payments. Generally, maturity period for bonds can be divided into three classes as flows:
• Short-term with maturities of up to 5 years
• Medium-term with maturities of between 5 and 12 years.
• Long term with maturity of above 12 years.

Structure
Another important fact to know about a bond before you buy is its structure. With traditional debt securities, the investor lends the issuer a specified amount of money for a specified time. In exchange, the investor receives fixed payments of interest on a regular
schedule for the life of the bonds, with the full principal returned at maturity. In recent years, however, the standard, fixed interest rate has been joined by other varieties. The three types of rates you are most likely to be offered are these: Fixed-rate Traditionally, most bonds bear fixed-rate accruable or payable at regular intervals.
Floating-rate These bonds have variable interest rates that are adjusted periodically according to an index tied to short-term Treasury bills or money markets. Federal Government bonds in Nigeria are adjusted periodically using the Minimum Rediscount
Rate (MRR) as the yardstick.
Zero-coupon These bonds have no periodic interest payments. Instead, they are sold at a deep discount to face value and redeemed for the full face value at maturity. On Zero coupon, tax must be paid on the interest accrued each year even though no interest is received.

[paragon]

Hi all, i am quite challenged at the rate at which you guys are hungry for information. Well, that's one of the reasons why we set up this forum. Please let me make it clear that any questions that go unanswered are not intentional.We will definitely pick them up and treat the as time goes by. Thankyou.

Yes, to BONDS. Basically, bonds are also referred to as money market instruments that are used by companies governments and organisations as a means of raising funds form the public.

The purpose of this funds are to finance projects, be it short term, medium term or long term as the case may be. However, most issued bonds are always long term.

The bonds are issued at a predetermined interest rate which can be referred to as the yield. For some people, they prefer iinvesting in bonds because the return is guaranuteed unlike the capital market where prices flunctuate. however, the return on investment is more in the stock market.

Looking at it from another angle, bonds are debts while stocks are equity. By purchasing equity( stocks) an investor lbecomes an owner in a corporation.By purchasing debts(bonds), an investor becomes a creditorto the corporation or government.

The primary advantage of being a creditor is that you have a higher claim on assets that shareholders do. In case of a bankruptcy, a bondholder will get paid first before a shareholder. however, a bondholder does not share in the profits if a company does well. He/she is only entitled to principal plus interest.

[SpecNomics]

I really am enjoying this forum and am so glad I joined.

I have long wondered why FGN Bonds had not been raised up in the Forum, giving that the Federal Government of Nigeria's (FGN) 5 yr Bond Sept-2008 has one of the highest Coupon Rates globally at 18.25%. Hedge Fund Managers around the world have been seduced by these handsome returns.

I know these Bonds can be purchased through Discount Houses, and I think minimum Purchased is about N10,000. Discount Houses are like stockbrokers but they deal predominantly in Money and Bond Markets.

For the Chap that purchased N10,000 FGN Bonds 18.25% Sept -2008, this means he would recieve annual payments of N1,825 until Sept 2008 when his N10'000 plus the annual payment for 2008 would be paid.

I do not know of any Bank Offering these savings rate i.e. circa 18%, so I have always been surprised as to why Nigerians did not buy the bonds enmass.

Total amount of N40bln was up for sell, yet only N12.3 was subscribed for! A significant risk in buying Bonds except from the obvious Default/Credit Risk (the risk that Borrower would not make interest payment or fail to pay back loaned amount), esp. re Govt. Bonds is Political Risk i.e. the risk a new govt. could come in and suspend all debt obligations. Perhaps this was a reason behind the lack of interest. To subsatntiate, the FGN 17.75% Sept-2006 Bond issued in 2003 where fully subscribed, I guess investors thought OBJ would still be in power so no Political Risk.

This risk is real in terms of buying Govt. Bonds in Nigeria. Another risk with Nigerian Govt. Bond I have heard is Liquidity risk (the risk that there would be no buyers when you want to sell), however this problem is more of technical problem i.e. Bond valuation Models are not yet up and running, so most holders would hold until the Bond Matures i.e. the amount loaned is repaid.

This is a rough sketch esp. on FGN Bonds Markets, pls feel free to ask about specific parts of it.

[Stockbear]

Considering the inherent problems that could possibly arise from Nigerian bonds, is it possible to invest in bonds of others countries?

If yes, how does one go about achieving this? What is the minimum investment? Is there any whose rate of return beats/surpasses that of Nigeria? Which country's bond would be the best to invest in?

[paragon]

yes you can invest in bonds outside Nigeria.Although i do not know what the minimum investment and other variables would be. However, the rate of return is more than that of nigeria. when you consider the rate atr which the naira is trading to other major world currencies, you'll understand. Also, they are more secure because their economy is not as volatile as ours. Nigeria and Nigerians are just beginning to catch the bond fever.

Lets see what comes out of it.

[SpecNomics]

@PARAGON - I beg to differ, While Nigeria is relatively more unstable, than other Govts. we do offer some of the best Coupon Rate in the world. And FX risk is mitigated since the Naira has been rising against leading currencies, thus an extra return for the Diaspora investor (NB this risk does not matter when calculating the return to the Nigerian based investor).

The FGN Bond 18.25% 09-2008 I mentioned was issued in 2003, there was limited Political risk attached to this and retrospectively would have been a good position on the fixed-income portfolio of any global investor.

UK, US 2 yr Bonds are trading at around 5 per cent, Japan is worse at a little over 1 per cent.

@ Stockbear - from the figures above I think you would agree with me that it would be waste of time buying these bonds. And yes they do exemplify the current yield in the global markets today. Noticed how GTB was able to issue Eurobonds at 8.25%, and it was oversubscribed, this isssue should not be, theoretically, successful in Nigeria since other bonds eg the FGN are offering rate more than double that.

Most Bond markets have a minimum investment in nominal amounts of 1,000 (in the UK). You can trd (buy and sell) utilising approved fixed-income dealers. The avg. investor gets exposure via fixed income mutual funds, or derivative products, a £1'000 is a bit steep for me, so I bet on FX and Interest Rate movements instead.

If your still keen, the Australian 2 yr Bond offers the best rates for the duration right now at circa 6 per cent

[Stockbear]

My investment strategy is to stretch every penny to its limit and beyond. If bonds are the way to go then count me in, but as all your contributions have shown I will stick with the NSE.

Thanks SpecNomics, I'm still waiting for your assessment on anomlys and peaks with reference to Zenith.

[ghm]

BONDS INVESTMENT IN NIGERIA
The Bonds market in Nigeria is emerging into a formidable platform for investment. Since 1999, the federal and government along with several state governments have issued bonds to generate capital to finance budget deficit, bridge long term funding gaps and finance long-term investments.

The Federal Government recently launched its N50 billion bonds in four trenches:

• N30 billion FGN Bonds 2006;
• N40 billion FGN Bonds 2008;
• FGN N40 billion FGN Floating rate Bonds 2010 and
• N40 billion FGN Floating Rate Bonds of 2013

The Coupon for the third and fourth floating rate bonds are to be determined using the MRR as the basis. The industry is set to receive further boost with the take off of the Pension Reforms Act. The Act allows Pension Funds Administrators to invest up to 100% of funds and assets in Federal Government Securities, which include governments bonds and treasury certificates. An estimated N600 billion is expected to be generated from pension contributions annually.

In other to have a robust platform necessary to stimulate participation in the trading of government bonds, plans are in the pipeline to create a virile secondary market, driven by the forces of demand and supply. The Debt Management Office of the Presidency has
already collected applications from discount houses, banks and securities dealers for Primary Dealers/Market Maker in Federal Government securities.

[hispy99]

DMO to introduce inflation-index bonds
By Udeme Ekwere
Published: Wednesday, 26 Nov 2008
The Debt Management Office has indicated its intention to float inflation-index bonds in the near future.

According to the Director-General, DMO, Mr. Abraham Nwankwo, this will be done to address issues of inflation rate instability.

Nwankwo disclosed this on the sidelines of an interactive session with the Primary Dealer Market Makers held at the First Securities Discount House in Lagos on Tuesday.

He said, “The DMO hopes to introduce inflation-index bonds, where the interest on the bonds will be rising as the inflation rate in the country rises. This is because we are aware that rising inflation rates can erode one’s earnings over a period of time.

“We are, therefore, doing this to ensure that the earnings that investors receive on the bonds will correspond with the inflation rate at the time.”

Nwankwo stated that the DMO had seen the need to introduce more debt instruments into the market.

He said that and this was one of the reasons why it was floating the 10 million-unit 20-year bond on Wednesday, to provide an opportunity for private organisations in the country to have access to long-term funds.

The DMO had earlier announced its decision to float the 20-year bond, with the aim of providing an opportunity for private organisations in the country to have access to long term-funds, as well as increase the awareness on the bond market.

Announcing this to journalists two weeks ago, the Director, Market Development Department of the DMO, Mrs. Patience Oniha, had said that the new 20-year bond was designed to address the negative economic trend.

She announced that the organisation planned to mobilise and sensitise the populace on the numerous advantages of a viable bond market and its link to economic development

[knightofdelta]

Originally Posted by hispy99

DMO to introduce inflation-index bonds
By Udeme Ekwere
Published: Wednesday, 26 Nov 2008
The Debt Management Office has indicated its intention to float inflation-index bonds in the near future.

According to the Director-General, DMO, Mr. Abraham Nwankwo, this will be done to address issues of inflation rate instability.

Nwankwo disclosed this on the sidelines of an interactive session with the Primary Dealer Market Makers held at the First Securities Discount House in Lagos on Tuesday.

He said, “The DMO hopes to introduce inflation-index bonds, where the interest on the bonds will be rising as the inflation rate in the country rises. This is because we are aware that rising inflation rates can erode one’s earnings over a period of time.

“We are, therefore, doing this to ensure that the earnings that investors receive on the bonds will correspond with the inflation rate at the time.”

Nwankwo stated that the DMO had seen the need to introduce more debt instruments into the market.

He said that and this was one of the reasons why it was floating the 10 million-unit 20-year bond on Wednesday, to provide an opportunity for private organisations in the country to have access to long-term funds.

The DMO had earlier announced its decision to float the 20-year bond, with the aim of providing an opportunity for private organisations in the country to have access to long term-funds, as well as increase the awareness on the bond market.

Announcing this to journalists two weeks ago, the Director, Market Development Department of the DMO, Mrs. Patience Oniha, had said that the new 20-year bond was designed to address the negative economic trend.

She announced that the organisation planned to mobilise and sensitise the populace on the numerous advantages of a viable bond market and its link to economic development

This is a welcome news. I just hope they will make it available for the masses so that the average investor can diversify.

[Michael]

Originally Posted by knightofdelta

This is a welcome news. I just hope they will make it available for the masses so that the average investor can diversify.

When You carry your money give Government. Na power you go take get am back O. These people don chop the excess crude money finish, now way oil price don fall, den dey find alternative mugu to fleace.

I no dey do this one!

[knightofdelta]

Originally Posted by Michael

When You carry your money give Government. Na power you go take get am back O. These people don chop the excess crude money finish, now way oil price don fall, den dey find alternative mugu to fleace.

I no dey do this one!

You gave a point there but I believe that government bonds are supposed to be safe and have full guarantee of the Federal Government. All the government needs to do to pay you back is just to print money and give to you, so there is no fear of default risk.