2. Bonds simply are terms for loans that you give to the Federal
Government, State Government, Companies etc.
It's a document issued by the Borrower (e.g the Government)
stating the amount borrowed from you (Bond holder), the periodic
interest rate (called coupons) , the tenure or years to repay the
original loan (the principal) on a stipulated date (the maturity date)
Aside banks, as an individual you may have some money you wish
to save. You may say you have just N10k to save a month from
your salary and wonder how that helps the government. Imagine
that there are 1million people with N10k to save, that transcends to
N10b already.
Also, have in mind that the money the banks actually lend are
money deposited by you and I. So you and I are the major source
of money for government, banks, corporations etc. That is why they
tax us, pursue us to open accounts, and pressure us to buy their
goods.
What are
Bonds?
Why invest
in Bonds as
an
Individual?
Between
Bonds and
Equities
Whilst both are investment securities they are different in their nature.
When you buy shares, you buy right to earn a dividend of a company.
Meaning that you only get dividends when the company decides to pay
you.
For Bonds, the borrower or issuer (Government or company) MUST pay
you interest (coupon) at the stated date. In other words, owners of
shares are equity holders, whilst owners of bonds are debt holders.
3. Bond issuers typically attach a coupon (interest rate) to the Bonds. For
instance, Government can issue a bond for say N10b, 10year bonds at a
coupon of 12%pa. This means they want to borrow N10b from the public and
are willing to pay 12% interest rate for it per annum for a period of 10years.
Usually they pay you the principal amount at maturity, at the end of 10years
and sometimes they can have the option to “call back" which basically
means they can pay you the principal before the 10 year period. Bonds with
"Call Back" are always clearly stated in the prospectus. So, if you borrow
them N10k, you form part of many others who must have lent them as well.
They pay you N1200 per annum and pay you the N10k a the end of 10
years.
Well, you may think of it as low but the if you put that same amount in a
Savings Account of bank you would probably get N400 and stand the risk of
loosing it if the bank collapses. Besides if it is N1m you invest then that's
N120k every year, N10m is N1.2m and N100m is N12m per annum.
Unlike equities, bonds are secured, Government bonds are mostly secure and are guaranteed
by the full faith and credit of the Government. Even if there is a war, the bond must be repaid
after the war is over.
How
Bonds
operate?
About
Bonds
yield
Bond yields are interest on traded bonds. Since bonds are tradable,
yield is a figure that shows the return you get on a bond.
Bonds Yield = coupon amount/price
So, if Government pays a coupon of 12%pa on your N10k bond and
supposing the value was N9k at the time it is sold, then whomever buys it will
earn N1200 on the N9k he paid out. Thus his yield is 1200/9000 = 13.33%.
So he gains an extra 1.33% and still gets another N1000 if he decides to wait
till the maturity of the bond. The yield of a bond moves in opposite direction
to its value. As the value dropped to N9k the yield increased to 13.33%.
4. Bonds can be purchased either through the Primary or Secondary
market.
The primary market is were you buy bonds that have just been offered by the
seller like the Government (just like buying a public offer).
The secondary market is where you buy tradable bonds that is, bonds from
the bonds market (just like buying shares in the stock market). Bonds traded
in the secondary market are usually done on the floor of the Nigerian Stock
Exchange or Over the Counter (OTC) through the PDMM (Primary Dealer
Market Maker)
PDMM are operators licensed to buy and sell bonds. Most of them are
banks. They also have discount houses who sell as well. You get the
application form from them, fill it, include your cheque in full for the amount
you wish to invest. You can invest as much as you can, from N10k to N1b
depending on your capabilities financially. But the minimum is N10k and
multiple of N1k thereafter.
The bonds purchased are confirmed through issuance of depository or
issuance of certificates. The depository is the CSCS (Central Security
Clearing System) an online storage for securities such as shares and bonds.
Interest on Government Bonds are paid Semi annually. For example in June
and December or in January and July. Payment is through issuance of
cheque sor warrants, similar to the dividend warrants you get for shares.
Interest rates can be fixed or floating. Fixed is when they will pay you
12%pa then it is 12%pa you get till the end if the maturity. Floating means
they may pay you an amount that is linked to a rate that moves with the
market. For example they might say Nibor (10% plus 2%. Meaning the rate is
benchmarked. The Nibor is a rate that banks use to lend money to each
other and it always changes in response to market conditions and is thus the
floating rate.
The Bonds
deal…
How to
invest?
5. EXPLORE THE BONDS MARKET TODAY
THANK YOU
“BUYING BONDS OFFER YOU HUGE OPPORTUNITIES FOR SIZEABLE
PROFITS WHILST YOUR MONEY IS SECURED, BUT AVOIDING BONDS
ALTOGETHER IMPLIES MISSING OUT ON THE OPPORTUNITY TO MAKE
PROFITS”
Kolawole Salis
(kola.salis@leadadvisorypartners.com)
