This article explains what The Federal Government of Nigeria (FGN) Bond is and how you can invest in it

What is a Bond?

bond is a contract between two companies. Companies or governments issue bonds because they need to borrow large amounts of money. They issue bonds and investors buy them (thereby giving the people who issued the bond money). Bonds have a maturity date

What is FGN Bond?

FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria (FGN) issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FGN has an obligation to pay the bondholder the principal and agreed interest as and when due. When you buy FGN Bonds, you are lending to the FGN for a specified period of time. The FGN Bonds are considered as the safest of all investments in domestic debt market because it is backed by the ‘full faith and credit’ of the Federal Government, and as such it is classified as a risk free debt instrument. They have no default risk, meaning that it is absolutely certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt.

Why does The Federal Government of Nigeria issue Bonds?

The Federal Government of Nigeria (FGN) issues Bonds for the following reasons:

• To finance government fiscal deficits in a non-inflationary and sustainable manner.

• To enhance the fiscal discipline of the Government.

• To refinance maturing debt obligations of the Federal Government.

• To establish a benchmark yield curve, this serves as a reference for pricing bonds issued by other bodies, especially the private sector issuers.

• 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 sustain the development of other segments of the Bond market.

• To diversify government financing sources

Features of FGN Bonds

  • Denomination: minimum subscription of N10,000.00 + multiple of N1,000.00 thereafter.
  • Yield: – Interest payment
    • Fixed interest rates: Most FGN bonds have fixed interest rates which are paid semi-annually.
    • Floating interest rates: Some FGN bonds (e.g. 3rd & 4th tranches of the 1st FGN bonds) have floating rates of interest which fluctuates around a reference rate(NTB rates) on the basis of specified parameters.
    • There are also zero-coupon bonds(not yet in issue in Nigeria) whereby both interest and principal are repaid at the final maturity date of the bond.
  • Tenor: Minimum of two (2) years. There are bonds with maturities of 3. 5, 7 and 10 years, in issue and for the future we may have bonds with maturities of 15, 20,30 years or more.
  • Default Risk: FGN bonds as a sovereign debt are the safest investment instrument. Default risk is nil. The Government always pays what is due to subscribers on the agreed date.

Benefits of an FGN Bond

  • It is 100% safe with guaranteed returns.
  • Incomes earned from the instrument are tax exempt.
  • It provides steady income and a more competitive interest rate.
  • The FGN Savings Bond Certificate can be used as collateral for loan.
  • The FGN Savings Bond Certificate can be used as a supporting document for VISA application at the Embassy
  • Tax free Income: interest received on FGN Bonds is not subject to withholding tax, company income tax, etc.
  • High and stable returns
  •  Free from default risk: repayment is guaranteed at the maturity of the FGN Bond
  • Collateral for borrowing: the FGN Bond can be used as collateral to raise financing.
  • Easily Tradable as it has a unique quality of being quoted on the Nigerian Stock Exchange and can also be traded over the counter (OTC)

How to invest in FGN Bonds

You can invest in bonds through a Primary Dealer/market maker (PD/MMs). PD/MMs can be banks, investment houses, brokers etc.

This is where Hillcrest Capital Mnagement Comes into Play; We help you with your investments from start to finish

How reliable is the Bond?

FGN Bonds are secured by the full faith and credit of the Federal Government of Nigeria. Their default capability is close to zero

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