Federal Government Bonds are debt securities (liabilities) of the Federal Government issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FG has an obligation to pay the bondholder the principal and agreed interest as and when due. When you buy FG Bonds, you are lending to the FG for a specified period of time.
The FG Bonds are considered as the safest of all investments in domestic debt market because it is backed by the ‘full faith and credit’ of the Federal Government, and as such it is classified as a risk free debt instrument. The establishment of the DMO marked the beginning of the institutionalization and professionalization of public debt management in Nigeria.
Below are some of the reasons why the Federal Government will issue bonds:
• To finance government fiscal deficits in a non-inflationary and sustainable manner.
• To refinance maturing debt obligations of the Federal Government.
• 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.
There are also Special Purpose FGN bonds which are issued to meet specific needs of the federal government. For instance, following the approval of Mr. President, special purpose bonds were issued to selected banks for settlement of N75 billion pension arrears in 2006.
The following are the features of a Federal Government Savings Bond.
- Denomination: minimum subscription of N10,000.00 + 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 fluctuates around a reference rate (NTB rates) on the basis of 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 for the future we may have bonds with maturities of 15, 20, and 30 years or more.
- 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.
Having given the introduction above detailing the meaning of FGN Savings Bond, its objective and features, below are the features of the bond issuance by the Federal Government of Nigeria coming up in the month of March through the Debt Management Office (DMO).
The features of the savings bond are as follows,
- Price : Single price rule (Interests would be determined by the DMO)
- Yield : Fixed interest rate at every auction
- Tenor : Between 2 – 3 years
- Coupon Payment: Quarterly while the principal will be paid at maturity.
- Transfer & Custody Agent: CSCS and any other licensed by SEC.
- Settlement: Bond holders will have their holdings credited into their CSCS account.
- Settlement Date : T+3 (Transaction day plus three days)
- Subscription Amount : Minimum (N5,000 plus multiples of N1000) and Maximum (N50,000,000)
- Subscription Tenor : The offer will be opened to investors for 5 days ( This includes the date of announcement and closure)
- Listing: The bond will be listed on NSE as well as any other exchanges with retail trading platforms.
- Auction & Frequency of Issuance: First auction will be on the 13th of March, 2017 while subsequent bond offerings will be monthly.
- Offer Size: To be determined at Auction.
- Subscription Mode: Through stockbroking firms accredited by DMO to act as distribution agents.
It is noteworthy to highlight some benefits to be derived from the Federal Government of Nigeria Savings Bond:
- It should offer better returns than interest rates currently being paid by banks on savings account.
- Steady source of income as coupon will be paid quarterly.
- It offers capital preservation as the Bondholder needs not worry about losing his/her capital if held to maturity.
- Interests derived from investments are tax free.
- It helps investors save towards larger investments or retirement.
- Coupons can be reinvested to increase holdings and yield on maturity.
References
- http://www.dmo.gov.ng/fgn-bondshttps://www.dmo.gov.ng/fgn-bonds
- http://admin.capitalbancorpng.com/portal_reports/The%20Federal%20Government%20of%20Nigeria%20Savings%20Bond_.pdf
