A bond is a contract or agreement between a lender and a borrower, in which the borrower enters into agreement to pay the lender both interest and principal at a particular period of time. Governments and Corporations issues bonds to raise money for projects from time to time. FGN Bonds are debt instruments issued by the Federal Government of Nigeria for an agreed period of time. As an investor you lend the government an amount of money in exchange for an interest and repayment of the principal at maturity. Maturity is the number of years that it will take for the re-payment of the principal of a bond. The period ranges from 5 to 10 or 20 years.
It is important for you to know that anyone (individual or corporate body) can invest in a FGN bond. The Government through the Debt Management Office (DMO) issue bonds and issue new ones every third Wednesday of every month.
Why invest in FGN Bonds?
- You earn high interest which are stable unlike other investments that fluctuates according to the performance of the instrument
- You are guaranteed of getting your investment back at maturity i.e. it is risk free
- You can invest without being taxed – no withholding tax, company tax or any other.
- You can use the bond instrument as collateral for loans.
- You can trade FGN bonds easily because it is quoted on the stock exchange.
How to Invest In FGB Bonds
To invest in FGN Bonds is not difficult at all, just follow the process below and you are on your way. For convenience it is better you use a broker rather than go it yourself. But if you want to do it yourself, go to the site of DMO to download the form and follow the simple instruction stated there. The step below is devoid of any technical term for quick understanding.
After you are convinced that you want to invest in FGN bonds, here are the steps you take.
- Go to a broker or your bank and enquire that they direct you to someone who can help you – an authorized person. Your bank might direct you to a trusted broker. Here is a list of primary dealer and market makers
- Determine how much you want to invest. Please note that the minimum amount you are required to invest is N10,000 and then multiples of N1,000. What this means in practice is that if you want to invest say N99,500 you will be required to invest either N99,000 or raise it up to N100,000. This will be N10,000 then multiples of N1,000 i.e. 90 x N1,000.
- Brokers operate differently and charge different minimum amount (mark-up are for administrative expenses). You can either pay, negotiate for a lower amount or find another broker.
- The broker might request that you open an account with them and give you a form to fill. Complete all process with the broker so that a CSCS account can be given to you so that your bond can be listed in the Nigerian Stock Exchange. It is important to do so because it will let you be able to sell your bond at anytime before the maturity.
- Be mindful of the fact that money is not involved up to this point. The minimum that your broker request you use to open account with is going to be used to purchase bond for you. That money will be kept with a Custodian (not your broker). Though the broker’s and the Custodian’s fees will be charged against you (a tiny proportion of a %). This is only when money is required.
- You can buy at the primary auction or secondary market. If you are bidding at the primary auction, you will fill a form and also transfer funds to your broker before the auction date. And after the auction you will be informed if you were successful or not. For example if the average minimum interest rate is 10% it means that all bids below 10% will be accepted. Now if you were successful your investment will be booked and a letter sent to you.
- However, if you were not successful due high bid rate, your money will be returned to your account with your broker. You can either hold on till the next primary auction or buy from your broker.
As you can see that investing in bond is not rocket science, what is your next move? Why not take the decision to lend to the federal government today? You can start small and gradually grow your investment. Read further about FGN Bond here
PS: Don’t forget to rate this article and also leave your comment/feedback