Federal Government Bond; knowing more on Nigeria government bonds

Federal Government Bond – have you heard about the Debt Management Office Nigeria (DMO)?

This is a company created by the federal government of Nigeria on the 4^th day of the month of October 2000 for a better management of Nigeria debt both foreign and domestic.

Some of these debts are debts owed to companies like London Club, Paris Club, African development bank and many more.

Now to settle these debts, debt securities of the Federal Government is raised in their respective unique forms, purposes and advertised to the attention of the general public by the Debt Management Office Nigeria (DMO) for purchase hence the concept of the topic – Federal Government Bond; get to know more on Nigeria government bonds.

To understand this more, the under listed will form our subtopics:

1. What is Federal Government Bond?
2. How to buy Federal Government Bonds
3. Federal Government of Nigeria Savings Bond
4. Federal Government of Nigeria SUKUK
5. What is the current interest rate on government bonds?
6. Conclusion.

What is Federal Government Bond?

This is a federal government long term debt security / instrument (government securities in Nigeria) usually denominated in Naira with a minimum tenor of 2 and maximum of 45 year which the government uses to erase debts in other to finance their budget deficits.

Further more on the definition; it is debt instrument which can be issued by federal, state or municipal government as in sovereignty bond to raise debt from the public. It can also be issued by a corporate body like Banks and blue chip companies.

Simply put this (Government bonds Nigeria) is an act of lending to the government by the public for state works. The Coupon earned in this security is tax free too.

Both bond and Treasury bill are similar but different in tenure only. Treasury bill has a maximum tenure of one year while Federal bond has a more elongated tenure that is above a year (2 years minimum).

How to buy Federal Government Bonds

Are you bothered with enquiries on how can I buy federal government bonds in Nigeria, How does government bonds work in Nigeria or how can I buy bonds in Nigeria well this session is designed to handle just that.

To buy a federal government bond, DMO Nigeria savings bond or Nigeria government bonds you must be guided by the steps below:

1. Wait for Debt Management Office Nigeria (DMO) to announce the federal government’s decision to sale Bond to people.
2. The announcement will contain steps, processes and procedures for one to buy as desired. Currently, the sale of bonds is a continuous thing which means that if there is someone ready to buy then there is a bond ready to be sold with or without a general announcement. Bond is sold quarterly in Nigeria.
3. Make your request through your bank where you have the money that is meant for the bond. This request will be sent to the concerned department that handles bond acquisition and purchase.

The highest bond is currently for 30 years. It was issued in 2015 which means that it will be over by 2045. Bonds are actually issued per Pal which means treading at 100 which is the default trading value of all bonds. This is for fresh / newly issued bonds

It can be traded at discount which is below 100 and also means that you the seller is losing while the buyer is gaining.

Finally bond can be traded at Premium too which means trading above 100 which means that the seller is gaining while the buyer is spending more since the seller is selling above Pal value.

Please note that discount and premium are both for trading on already sold bond after its first sales. When this happens, it’s said to be reopened.

The interest rate attached to bonds is known as Coupon rate. This Coupon Rate is redeemed semi annually

Please note that the Maximum amount of money one can invest in Bond is N50m. We will still discuss this further.

Federal Government of Nigeria SUKUK:

This is a bond that is designed according to Islamic tenets which means that:

1. The proceeds of SUKUK bond must not be used for the renovation of places like hotels, breweries and other places of such.
2. The bond can only be used to for road renovation and construction, hospital renovation and construction and the likes.
3. This bond can only be used for the project for which it was raised and it is currently known as the most beneficial and valuable bond ever sold in Nigeria.

Second Niger Bridge and many federal roads currently under construction are done using SUKUK Bond.

However, there is an aspect of this bond that does not really agree with its Islamic fundamental structure. That aspect is that Islamic banking does not attract rate but this type of bond still attracts Coupon rate which means that it is interest bearing.

Osun State Nigeria is the first State to have issued Sukuk bond in Nigeria apart from Federal Government of Nigeria.

Federal government of Nigeria savings bond

This is bond raised against investors with funds as low as N1m for a period of 2 or 3 years for them to be able to feel that they belong and benefit too.

The Coupon rate of savings bonds is not really huge but is very attractive. Nigeria Stock Exchange and Federal Mortgage Banks are usually saddled with the responsibility of selling saving Bond.

Finally note that this is for retail customers.

Current Rates of Government Bonds Nigeria

What is the current interest rate on government bonds? The first bond sold was sold at a rate of 15.47% but this year and the bond raised around June 2020 for N150 Billion was done at the rate of 9.2%.

Please remember that this interest rate is known as Coupon rate.

Based on this, Bond promises three types of payment or Cash flow:

1. Coupon payment which is the payment of the accrued interest which is paid half yearly.
2. Principal Payment which is the principal the person invested in the Bond.
3. Bullet Payment is the final payment on invested in Bond which comprises both the interest and the principal. Once this is done, then the Bond Investment contract is thereby terminated.

Conclusion:

Please take note of this information, when a bond is issued within Nigeria and is denominated in Naira, it is bears the nomenclature Federal Government Bond but when it is issued in other currency like United States Dollar – USD, Great Britain Pound – GBP and Euro Currency – EUR, it is called Euro Bond.

Whether it bears the name Federal Government Bond or Euro Bond, they are the same except that the currency is difference.

You can read: Fixed Deposit