In the previous edition of the Bounce Masterclass, we talked about investing in treasury bills.

In this edition, we are focusing on bonds.

“When we talk about bonds, one of the things you need to understand as a subscriber is that you are lending money to government.

“Just as Ekene lent money to his friends for his business, so also, he can lend to government to execute a project,” started Geoff Iyatse, a financial analyst, while speaking at the Bounce Masterclass.

“The only difference is that while his friend can afford to default, government cannot,” he said.

Bond is a debt instrument that a government or even a corporate organization can issue to enable it raise money and execute certain project.

For instance, the federal government may want to build a road or a dam, which may be critical to the economic life of the country but it does not have cash to execute the project.

Have you ever wondered, how does government source for funding to execute some of these projects? One of such ways is by issuing bonds.

A Bond can be compared to an I-O-U, (I Owe You) with a promise to pay back.

So, when you subscribe to a bond, what you have simply done is that you have given money to government to carry out certain projects in return for some percentage of interest on your money.

This interest, which is called Coupon Rate, will be paid to you periodically.

What Makes Bonds Different?

There are certain features that make bonds stand out as a debt or investment instrument.

First, bonds are different from shares. If Ekene were to invest in a government or corporate bond, he does not buy ownership stake in any government or company.

Instead he is just lending the government or company money. The lender will give Ekene a certificate in return as proof that it borrowed money from him.

In this case, even if the company or government runs into any financial trouble in future, Ekene will be considered before the ownership of the company.

This fact automatically stands bonds out and makes it less risky as an investment instrument. For someone like Ekene, he would have suffered no risk of loss had he lent the 1 million naira to the government through bonds.

Government will always exist, it means there is no much risk attached to government bonds.

Like the Lannisters in the Game of Thrones, government always pays its debts.

It is not only the federal government that issues bonds. State government, local government and private companies can issue bonds as well.

But the focus of this discourse is the one issued by the federal government which is also known as Sovereign Bond.

Just as banks cannot give Ekene money without charging him, so also can government not ask him to lend it money without offering anything in return.

It is that return that motivated him to lend his friend money that will also motivate him to lend government money.

Although the returns may be less, it is guaranteed unlike the juicy one promised by person limited by time and circumstances.

Without the returns, it is almost certain that Ekene or even anyone else would NOT be interested in buying government bonds.

Who qualifies to hold bonds?

Everybody qualifies to subscribe to a government bond. As we stated earlier, even Ekene who is an illiterate can subscribe into government bonds.

Besides being a citizen, another important criterion is to hold a bank account.

Although not having a bank account will not disqualify you, it is imperative for a smooth transaction as most of the transactions would be conducted through the subscriber’s bank account.

Procedures For Investing In FGN Bonds

Should Ekene resolve to invest in government bonds, he would follow through with the following steps:

*Locate Those Who Are Entrusted With The Responsibility Of Selling Bonds: The Federal Government Of Nigeria, FGN Bonds are administered by the department known as Debt of Management Office, DMO.

It is not every stockbroker or investment house that can sell FGN bonds. But there is a list of dealers who are called Primary Dealer Market Makers, PDMM.

Those are the people saddled with the responsibility of selling bonds. So, Ekene will need to locate any of them nearest to him, complete some documentation and he is good to go.

Provide Identification Details: Ekene’s personal information is critical to starting the process of his bonds subscription.

Continue here: http://news.bounce.ng/Content/bouncemasterclass-how-to-invest-in-bonds-1-20170925

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