Frequently Asked Questions (FAQs) on FGN Bonds

 

Federal Government of Nigeria (FGN) Bonds are long-term debt instruments issued by the Debt Management Office (“DMO”) on behalf of the federal government of Nigeria. When an investor purchases an FGN bond, the investor is indirectly lending to the government to finance its budget deficit. Interest is earned on the investment semi-annually or quarterly.

 

The Government through the DMO issues bonds through a Primary Market Auction (PMA) conducted on the third or fourth Wednesday of each month. However, after purchase from the Primary market, investors and stock brokers can resell bonds at the secondary market.

 

There are two markets for dealing government securities – the primary and secondary markets. Furthermore, bonds are also traded on the floors of the Nigerian Stock Exchange (mostly retail) and the FMDQ OTC Securities Exchange (mostly Wholesale).

 

The primary market is the market in which Government securities are initially issued for sale while the secondary market is the market for trading previously issued instruments.

 

Bond Prices and interest rates have an inverse relationship. As interest rates fall, bond prices appreciate and vice-versa. However, if a bond is purchased and held to maturity, rising or falling interest rates do not impact on the principal received at maturity.

 

The FGN bond is a risk-free investment because it is backed by the full faith and credit of the Federal Government of Nigeria and the risk of default is zero. Principals and returns are guaranteed. However, there could be a risk of losing value if you decide to sell before maturity given the prevalent possible risks of liquidity, inflation, credit-spread and re-investment amongst others.

 

Proceeds from sale of bonds are exempt from withholding tax unlike bank placements. Thus, it is more attractive compared to bank placements/fixed deposit on an annualized basis. Likewise, interest earned on bonds are also non-taxable, hence, tax deductible.

 

  • Guaranteed principal and returns (zero default risk)
  • Income earned on FGN bonds are tax-free and can be used as collateral for short-term borrowings from commercial banks.
  • Fixed and regular income.
  • Bonds lock in investments against fluctuations

 

Investment in government bonds is open to the public. Therefore, individuals and corporates alike can invest in bonds.

 

A minimum subscription of N50.0m is required to purchase FGN bonds as specified by the DMO but you can purchase FGN bonds through Afrinvest Securities Limited with a minimum subscription of only N20.0m.

 

Investors lend to bond issuers when they buy bonds. In return, the bond issuers agree to pay the investors’ interest throughout the bond’s lifetime and a repayment of the face value of the bond upon maturity. The yield is the money earned by the investors.

 

An inverse relationship exists between the bond yield and prices. For instance, assume an investor purchases a bond with a 10% annual coupon rate and a par value of N1,000. The annual yield is the interest divided by its par value – N100/N1,000 – the bonds nominal yield is 10%, the same as its coupon rate. On the other hand, if the investor decides to sell the bond at a lower price of N900 with the same 10% coupon rate, the annual yield/return will be N100/N900 which is 11.1%.

 

Bond tenors refer to the time-to-maturity of a bond. The minimum bond tenor is 2 years. Available bonds in issues have maturities of (3, 5, 7, 10 & 20) years in issue.

 

We charge a 1% flat fee on the face value of the transaction.

 

The Coupon/ Interest will be paid into an account designated by the investor within the duration of the bond and the principal is repaid at maturity.

 

If the coupon rate is 14% on a 3-year bond, an investor gets 14%*Face Value of the bond e.g. N1,000.00 = N140.0. Therefore, the semiannual payment would be N70.0 i.e. N140 divided by 2-part payments for the lifetime (3 years) of the bond which would then be a total of 6 payments (N70+N70+N70+N70+N70+N70 = N420)

 

No. Bonds can be sold in the secondary market before maturity. However, there is a risk that the bond can be sold at a discount to the initial investment. On the flipside, there is the possibility that they can also be sold at a premium to the initial purchase price.

 

  • Step 1: Indicate interest by contacting us via e-mail (brokerageteam@afrinvest.com) or phone call-+234 809 778 3100 (Adedoyin) or +234 818 334 2612 (Vwede)
  • Choose your preferred FGN bond
  • Fund your in-house account (detailed below) with the Face Value you wish to invest
Bank Account Name Account Number
Stanbic IBTC Afrinvest Securities Bond 0020715042

 

Other processes may involve opening an S4 account on CSCS which once concluded, your in-house account will be debited, and bonds domiciled in your CSCS account after 2 working days of the transaction (i.e. T+2).

 

Once you indicate the interest to optimize your current portfolio, the Securities Trading Team in conjunction with the Investment Research Team will can carry out a detailed analysis of your current holdings and make recommendations as appropriate.

 

Yes, Afrinvest Securities Limited can provide additional information for clients upon request. In addition to this, we also update existing clients on a weekly basis, about new offerings and investment opportunities they can take advantage of.