What are the types of bonds in Nigeria? Let’s start with the meaning first. Bonds are a type of debt. One party makes an offer to pay a percentage, for holding and using money in interest after a certain amount of time, and another party makes his money available to the borrowing party, with the assurance of getting his money back, plus interest, after the stipulated time. Therefore, bonds are a form of debt, and at the same time a form of investment, although typically, not a high paying one.
In more detail, Bonds are fixed income instruments issued by entities (government or corporate) to raise funds. The issuer of a bond ultimately makes a promise to make available regular, fixed, payments of money to the investor or the buyer of the bond. The person who buys a bond is sometimes called a bondholder.
Types of Bonds in Nigeria
These payments of money are also called coupons and the bonds that make coupon payments annually are known as annual coupon bonds, while the types of bonds that pay coupons twice a year are known as semi-annual coupon bonds. Bonds that make no coupon payments are called zero-coupon bonds although some professionals prefer to call them deep discount bonds. While making a decision to buy a bond, investors should consider a number of factors such as the tenure of the bond (how long it will take before you get your money and interest back), the coupon payments (how often, or how many installments it will take for you to get back your money) expressed as a single percentage rate, and the yield-to-maturity (how much interest or profit you will get for investing in a particular bond ) or just simply, yield.
Types of Bonds in Nigeria
The Nigerian Stock Exchange (NSE) is the body through which securities are traded, and they host and list many different fixed income instruments on their platform. Some of the types of Bonds that are traded in Nigeria include:
1. Federal Government Bonds
As expected these are the most popular types of Bonds in Nigeria. They are the most liquid and capitalized bonds on the Nigerian Stock Exchange. The Federal Government issues bonds in the primary market through the Debt Management Office, through its monthly auctions and then these bonds are subsequently listed and traded on the Exchange. These Federal Government Bonds are backed by the full faith, credibility and financial might of the Federal Government of Nigeria, and that is the major reason why they are so popular: people fully believe that the Federal Government will not renege on its promise to pay back the monies with interest. The Bonds are semi-annual (paid every 6 months), coupon-paying bonds. Interest earned on FGN Bonds is tax-free.
Federal Government of Nigeria Savings Bonds is a new initiative launched by the DMO in partnership with the Nigerian Stock Exchange to raise capital for government projects from the purses of retail investors. Just like the Federal Government Bonds highlighted above they are tax-free and are backed by the full faith, credibility and financial muscle of the Federal Government of Nigeria. The FGN Savings Bonds are currently issued for 2-yr and 3-yr tenures and are quarterly paying coupons.
3. State/Local Government Bonds
State and Local Government Bonds are regarded as Sub-National Bonds and are a less popular type of Bonds, issued by State or Local Governments usually to raise capital to fund projects in the state or locality. As the Federal Government of Nigeria Bonds, these bonds are semi-annual coupons paying bonds and are also backed by the State Government or Local Government issuing the bonds. There is a lot of work to be done in promoting these types of Bonds because they are not very popular.
As the name would suggest, Supranational bonds are issued by more than one national government. Technically, they are called supranational entities that are formed when two or more sovereign nations with similar or aligned interests unite to pursue a common agenda most often to pursue a common project, or promote economic development in member economies. In this context Economic Community of West African States ECOWAS can be described as a Supranational Entity, and if or when the issue a bond that bond would be described as a Supranational Bond, and would be listed not only on the Nigerian Stock Exchange but also on the exchanges of other member countries because they too would benefit from the projects when they come to fruition.
Corporate Bonds are a kind of bonds that are issued by private and/or public companies. They are an alternative to listing shares or rights of the company, when the need may arise to raise capital for expansion purposes. Usually, these bonds have higher interest rates or yields than Government Bonds and the bonds are backed by the corporate entity issuing the bond. In Nigeria, this option is seldom traveled, most companies prefer to issue shares, and pay dividend (or not) when available.
Green Bonds are a special type of bonds issued to fund projects that generate climate or environmental benefits such as reforestation of deforested areas, fighting desertification, flooding and erosion, investing in renewable energy, sustainable waste management, clean water, and so on.
Sukuk is a reference to Islamic banking and finance which is recently being promoted in Nigeria, due to its obvious benefits. For example, as opposed to conventional bonds, which merely confer ownership of a debt, and promises to pay back with interest, Sukuk grants the investor a share of an asset, along with the benefits and risks that come with business. A Sukuk is an Islamic financial certificate, which is similar to a bond in Western finance, but the major difference being that according to the Sharia (Islamic religious law) you are a part-owner of the business when the company is indebted to you.
Eurobonds was once a term given to bonds issued by European countries which were sold outside Europe, these days they are any bonds that are issued outside of a country in which the currency of that bond is denominated. Today, if the US government or the state of New York issues a bond, it will be known as a Eurobond. Therefore, Countries, states Big Corporate Entities, as well as Supranational Institutions and so on, may issue Eurobonds to diversify their funding mix, as well as get money from other areas.
It is important that we inform you that you can now buy and sell bonds through your stockbroker just like shares because they are listed on the Nigerian Stock Exchange. Ask your Stock Broker, Solicitor or Financial Planner for more information.
That’s all about the types of Bonds in Nigeria.
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