The Debt Management Office of Nigeria launched a new retail savings/investment program called the FGN Savings Bonds. We will try to explain what the FGN Savings Bond means and how you can subscribe to it and how it should be part of a simple retail portfolio management strategy. We will also explain the difference between this product and other similar ones such as FGN Treasury Bills.
What is a Bond?
A bond is a confirmation from a borrower that it borrowed money (cash) from a lender at a given interest rate and repayable over a period. Bonds also include how payment of the principal and interest will be made. They also include the minimum amount that can be subscribed by a lender and in what multiples. Bonds are evidenced by an instrument typically issued by a company or country in exchange for cash.
What are FGN Bonds?
FGN Bond is a bond issued by the Federal Government of Nigeria in exchange for cash at a given interest rate and a repayment period. It also states how payments of the principal and interest will be made. Nigeria has more than one FGN Bond, with each differentiated by their respective tenor (duration) and interest rate.
What is FGN Savings Bond?
A FGN Savings Bond is a bond issued by the Debt Management Office on behalf of the Nigerian Federal Government. The bond is tailored and targeted at “low net worthy” retail & corporate investors and includes a guaranteed interest payment and repayment of the principal.
Why is the Nigerian Federal Government issuing a retail savings bond?
The government is issuing savings bonds targeted at ordinary Nigerians (and/or Nigerian entities – SMEs, MFBs, Coops etc) of all income groups, giving them the opportunity to earn an income through saving and investing. The bond is also expected to help to promote the savings culture of Nigerians. Most Nigerians are thought not to save in banks because of very low-interest rates.
What are the benefits ?
• The savings bond earns you an interest that will be paid quarterly (every subsequent 3rd month from date of issuance) directly into client’s specified KYC bank account.
• The savings bond is safe and is backed by the full faith and credit of the FGN (Federal Govt. of Nigeria). FGN Bonds hardly default, so you are nearly 100% sure that you will get your money back in full along with the interest.
• You need not be rich to invest as anyone with as little as N5,000 can invest in the bond.
• FGN savings bond is a good way to save towards marriage, event/occasion, school, project, retirement etc.
• You can also use the savings bond as a collateral to get a loan from a bank and/or finance house.
What are the risk?
FGN Bonds are often said to be ‘risk free’ because the Nigerian Federal Government hardly defaults on debt repayments especially if it is a Naira denominated debt. However, being a bond there are a few risks, should you decide to sell before maturity.
– Just like a stock, you can invest N1 million in a bond and get only N900k in principal. We’ll explain this later.
– You also face the risk of losing the value of your investment to inflation. If the interest rate on the FGN Savings Bond is lower than inflation rate, then your returns are lower in real terms. In a high inflationary environment like Nigeria is currently experiencing, investing in bonds can lead to a loss of value if the rates are lower than inflation.
How much can I invest?
“Low net worthy” retail & corporate investors looking to invest in the FGN Savings Bond only need a minimum of N5,000 to invest. Subsequent investment over N5,000 will be in multiples of N1,000. Meaning that you cannot invest N5,500 or N12,700. It’s either N6,000 or N13,000 or N30,000. The maximum amount a single investor can invest in the FGN Bond is N50 million.
Where can I buy it from?
You can buy it from any of the DMO-approved registered stockbrokers. Just ask your stockbroker if they are authorized to sell on the NGSE secondary market. It’s that simple.
What is the tenor of the loans and what is the interest rate?
The bonds have a tenor of 2 and 3 years respectively. Meaning that you can either invest in an FGN Savings Bond with a duration of 2 years or one with a duration of 3 years. The interest rates are determined by the Debt Management Office. They decide what rates they are willing to pay.
How will the interest and principal be paid?
The interest will be paid quarterly directly into clients’ bank accounts while the principal will be paid bullet at maturity (the end of the tenor, 2 or 3 years) via clients’ respective Stockbroker depending on what duration he/she subscribed to.
When will the Nigerian Federal Government start to sell FGN Savings Bonds?
The Nigerian Federal Government via the Debt Management Office (DMO) will start selling FGN Bonds on the 13th of March 2017.
Will it be issued monthly?
Yes, new FGN Savings Bond(s) of 2-year and/or 3-year tenor will be issued every 1st Monday of the next subsequent month.
What if I decide to sell before maturity?
You need not hold on to the bond until maturity. If you need cash anytime during the duration of the bond, you can sell all or part of your bonds in exchange for cash. However, the remaining interest that you are not entitled to earn till maturity date because you have sold will not accrue to you any longer. For example, if you buy the FGN S-Bond dd. 13th Mar-2017 and sell dd. 23rd Aug-2018 because you cannot wait till maturity date dd. 13th Mar-2019 (after two years for a 2-yr tenor FGN S- Bond) for your investment to mature, you will only be entitled to the interest(s) earned between 13th Mar-2017 and 23rd Aug-2018 and a value of the principal as priced in the secondary market. Also, note that should you wish to sell before maturity, you may pay a max. 1% transaction fee to your stockbroker. Also, because it is a bond, the final amount you get might be lower or higher than your initial investment depending on the market value of the bond at the moment of sales.
What is a market value?
A bond has certain characteristics similar to a stock. Being an instrument, bond prices can often be higher or lower than their face value. A face value of a Nigerian Bond is typically N1,000. Let’s assume you bought 2-year tenor FGN Savings Bond at N1 million and at an interest rate of 13% per annum in March-2017. It means that for every N1,000 of your investment, you will earn N260 (also known as the coupon rate) in Mar-2019. So, if you decide to hold your N1 million to maturity, you will earn N260,000.
In the NGSE secondary bond market, bond prices behave like equities (stocks) and react to the forces of demand and supply. Supposing lending rates in the country suddenly rise to 16%. It means that the bond you bought that earns you 13% is no longer attractive as the FGN will only continue to pay the N260 for every N1,000 in face value.
Therefore to earn a return of 16% at the coupon of N260, the bond will need to sell for a ‘dirty’ value of N814.11. So, should you wish to sell your bond when the price is going for N814.11, either because you are in need of cash or just as part of your trading activities, you will only get N814,110 (still subject to transaction charges) and lose N185,890. This explains the risks we talked about earlier.
Can I buy even more within a tenor?
Yes, you can subscribe for more provided it is in multiples of N1,000 via NGSE secondary market purchases but not exceeding a total cumulative amount of N50 million via DMO primary auctions.
How To Improve Your Portfolio With FGN Savings Bonds?
FGN Savings Bonds are considered passive investment strategy to ensure capital preservation with low risk. Most investors on the NGSE simply buy equities but these have very high risk profile. In order for investors to reduce and stabilize their portfolios’ risk profile, they can apply the following simple strategy:
– Note his/her age, for example, 45 yrs;
– Accept a 100-year life scan for every investor;
– For this client, we recommend a 45% equity investment and a 55% savings bond investment within his/her portfolio.
In the current global cyclical bearish financial environment, to improve annual real return and risk profile on investment – we strongly recommend to start to consider re-allocation & re-investment of part of client’s equities/profits into saving bonds.
What is the difference between FGN Savings Bonds and FGN Treasury Bonds/Bills?
• Unlike FGN Treasury Bonds, FGN Savings Bonds has duration of between 2-3 years. They should actually be called FGN Savings Notes. FGN Treasury Bills are not more than 1 year with also shorter tenors of 91 days and 182 days and when FGN S-Bonds have less than 12 months TTM (time to maturity) then they can be called FGN S-Bills.
• FGN Treasury Bonds/Bills rates are determined by the forces of demand and supply on the FMDQ. The DMO says that FGN Saving Bonds rates will be determined by them based on the average rate of 91-day FGN T-bills for the earlier month. Why? – interest on FGN S-Bond must be paid quarterly thus FGN needs to raise cash via 91-day FGN T-bills primary auction to meet these payments.
• FGN Treasury Bills’ interest is paid upfront. For example, if you invest in FGN Treasury Bills today, they will pay you all your interest today. For FGN Savings Bonds, it will be at the end of the first quarter from date of issuance.
• Unlike FGN Savings Bonds, FGN Treasury Bills are not sold in the stock market. They are sold on the FMDQ.
• The DMO has also now said, FGN Treasury Bills can no longer be sold on the FMDQ to investors who have less than N50,000,1000.
Do you still feel like we are yet to respond to all your questions? Drop a comment or send us an email to TRW Stockbrokers Limited (firstname.lastname@example.org) and/or Ekwueme Mike Anyadibe (email@example.com)….