How To Invest In FGN Savings Bond

How To Invest In FGN Savings Bond

Have you been looking for a low-risk investment, such as the Federal Government of Nigeria (FGN) Bonds? Look no further. This article reveals all you need to know FGN bonds, how it works, and to invest and make money from it.

What is an 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 Federal Government of Nigeria has an obligation to pay the bondholder the principal and interest agreed to, as and when due.

Buying Federal Government Bonds(FGN Bonds) means you are lending to the Federal Government, of Nigeria for a specified time.

FGN Bonds is classified as a risk-free debt instrument as it is considered the safest of all investments in the domestic debt market because it is backed by the full faith and credit of the Federal Government of Nigeria. They have no default risk, meaning that it is certain your interest and principal will be paid as and when due.
One interesting thing about investing in FGN Bonds is that the interest income you earn from the securities is tax-exempt. (I.e you won’t have to pay tax on them again).

Features Of FGN Savings Bond

Denomination: FGN Bonds has a minimum subscription of N50,001,000.00 + 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 around a reference rate(NTB rates) based on 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 bonds with more years could exist in the future,

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.

Why do the Federal Government of Nigeria issue Bonds?

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

• 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.

Why you should invest in FGN bond?

• Retirement Purposes.
• Starting or expanding a business.
• Settlement after the apprenticeship.
• Settle bills such as Payment of children’s school fees in the future(e.g for University education).
• Building a house or the developing of a capital project.
• Future projects by town unions, associations, student unions.
• To fund future social events such as weddings, graduation ceremonies.
• Settlement of pension insurance obligation( for Corporate Fund Managers).

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Benefits of FGN Bonds to the investors

• It is a risk-free investment.
• The income earned (interest payments) are tax exempt.
• It provides relatively high and stable returns when compared to the conventional bank deposit.
• The principal element, which is to be collected at maturity can be used as collateral for securing credit facilities from financial institutions such as banks.
• Bondholders that want cash can trade the bonds on the floors of the NSE and FMDQ OTC Securities
• Exchange for immediate cash before maturity.
  It qualifies as liquid assets for banks in the estimation of their liquidity ratios by the CBN.

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Benefits of FGN bonds to the Economy

• It fosters economic development by promoting the use of long-term funds for long-term investment in the economy.
• It serves as an efficient way of mobilizing domestic financial resources for productive investment in a non-inflationary manner.
• It provides an alternative source of funding to the Government, promotes self-reliance, and reduce over-dependence on external finance.
• It helps investors to diversify their portfolio and enhances stable return on their portfolio.
• It serves as an efficient and effective way of mobilizing funds for infrastructural development with the multiplier effect of promoting economic diversification.
• It helps to facilitate financial inclusion.
• It promotes the fiscal discipline of the Government.
• It helps the government funds its budget deficits in a non-inflationary manner by reducing resort to ways and means provided by the monetary authority to the Government.
• It provides a benchmark yield-curve for pricing other debt securities/bonds.
• It provides the basic infrastructure for the development of the financial system and the overall economy.
• It strengthens the implementation of monetary policy by the Central Bank of Nigeria.
• It enhances transparency, discipline, and stability in the public finance management of the country.

Regulators and Government Agencies in the FGN Bond Operations

Debt Management Office (DMO): DMO is the Agency statutorily authorized by law to issue FGN Bonds on behalf of the Federal Government of Nigeria. The DMO also regulates the activities of the bond market and the Primary Dealer Market Makers.

Central Bank of Nigeria (CBN): The Central Bank of Nigeria acts as the Issuing House and the Registrars for FGN Bonds.

The Nigerian Stock Exchange (NSE): FGN Securities are listed and traded on the Floors of the Nigerian Stock Exchange mainly by retail investors.

Financial Market Dealers Quotation (FMDQ) Plc.: FGN Securities are listed and traded on the Over The Counter (OTC) Trading Platform of FMDQ mainly by wholesale investors.

Central Securities Clearing Systems Ltd (CSCS): Acts as the depository of the bonds listed on the Nigerian Stock Exchange. Investors who opted for physical certificates at the issue must have their certificates deposited in CSCS before transactions on them on the floors of the Nigerian Stock Exchange and FMDQ OTC Securities Exchange.

Securities and Exchange Commission (SEC): The apex regulator in the Nigerian Capital Market; it regulates the activities of all capital market operators as far as operations and their transactions in the market are concerned.

How To Buy FGN Bonds

FGN Bonds can be bought from two(2) major sources which are:

Primary Debt Market: FGN Bonds Auctions Exercise is carried out by the DMO every month. Primary Dealer Market Makers (PDMMs) empaneled by the DMO in 2006 are responsible for submitting bids for themselves and on behalf of their clients at the Auctions.

The primary market is where you buy bonds that have just been offered by the seller like the Government (I.e you can buy from the public offer).

Secondary Debt Market: Trading in FGN Bond is done daily in the Secondary debt market by licensed broker-dealers (banks and stockbrokers) on the floor of The Nigeria Securities Exchange (NSE) and FMDQ Over The Counter (OTC) Securities Exchange. The Primary Dealer Market Makers (PDMMs) are obligated to provide a two-way quote for FGN Bonds. This means that you can buy or sell your FGN Bonds whenever the need arises.

Bonds sold in the primary or secondary market are bought through a Primary Dealer Market Maker (PDMM). PDMM are licensed operators who can buy and sell bonds. Most of the PDMMs are banks such as First Bank of Nigeria (FBN), United Bank of Africa (UBA)Zenith, Guarantee Trust Bank (GTB), Access Bank, Diamond Bank, etc.