FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria issued by the Debt Management Office for and on behalf of the Federal Government. The government has an obligation to pay the bondholder the principal and agreed interest as and when due.
When you buy FGN Bonds, you are lending to the Federal Government for a specified period of time. The FGN Bonds are considered as the safest of all investments in the domestic debt market because they are backed by the ‘full faith and credit’ of the Federal Government, and as such, they are classified as a risk-free debt instrument.
They have no default risk, meaning that it is absolutely certain your interest and principal will be paid as and when due. The interest income earned from the securities are tax exempt, according to the DMO.
As an investor, you can lend the government the amount you are investing in bonds and earn interest (coupon) every six months until the maturity of the bond when the principal amount will be repaid.
Bonds assure the investor of the principal amount at maturity and periodic interests.
Payment of interest is through the issuance of cheques or warrants, which are similar to the dividend warrants for shares.
This form of investment is not risky because it is guaranteed by the government.
Bonds are typically long-term investment, but you can decide to sell them off on the bond market if you want to quit.
To invest in bonds or participate at the primary market auction, you can visit your bank and submit your application, stating you investment amount, the preferred tenor and bid yield.
A number of people think of bonds as another type of equity investment, but with lower risks. But it is a misconception that bonds are a form of equity, according to https://toughnickel.com.
Bonds are a form of debt, with the person buying the bond being the lender. Bonds exist because organisations, whether they are public or private, need to raise money for various reasons. Whether it is a multinational corporation, a local bank or a state government, they will issue bonds in the hopes of raising money so they can spend it on pending projects or other avenues.
But the entity requesting money through bonds must offer something to the other party in the transaction. No one is going to lend money to companies out of the goodness of their heart. But they will lend money if they receive a return at the end of the bond period. The interest rate on bonds is known as the coupon, which is set before the individual agrees to buy a bond. When the borrower pays back the bond to the lender, they will pay the amount borrowed along with the interest rate.
For example, a company may offer a bond with a value of N2,000, along with an interest rate of 10 per cent. If the bond has a maturity of two years, the lender will receive an interest payment of N200 in each of the two years, along with the N2,000 at the end of the two-year term. By lending the entity N2,000, the individual ends up with N2,400.