About FGN Bonds
An Introduction to FGN Bonds
FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria (FGN) issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FGN 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 FGN for a specified period of time. The FGN 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. 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.
Why Federal Government of Nigeria issue Bonds?
The Federal Government of Nigeria (FGN) issues Bonds for the following reasons:
• To finance government fiscal deficits in a non-inflationary and sustainable manner.
• To enhance fiscal discipline of the Government.
• To refinance maturing debt obligations of the Federal Government.
• To establish benchmark yield curve, this serves as reference for pricing bonds issued by other bodies, especially the private sector issuers.
• To develop and ensure liquidity in the domestic bond market on a sustainable basis.
• 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.
Special Purpose Bonds
Special Purpose FGN bonds are bonds issued to meet specific needs of the federal government, such as special purpose bonds issued to selected banks for settlement of N75 billion pension arrears in 2006, five deposit money banks participated in the private placement arrangement. Others include Bonds issued for the funding of Abuja Express ways (Airport Road and Kubwa) and to settle Local Contractors Debts.
Features of FGN Bonds
- To finance government deficits in a non-inflationary and sustainable manner
- To enhance fiscal discipline and for the management of monetary policies
- To restructure the existing debt stock of short term debt to longer term obligations
- To establish a benchmark yield curve, which acts as a reference for pricing other bonds issued by other bodies
- To develop the domestic bond market on a sustainable basis
- To enhance and deepen the savings and investment opportunities
Special Purpose FGN Bond
Special Purpose FGN bonds are bonds 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. Five deposit money banks participated in the private placement arrangement. In addition, in 2006 FGN floated bonds for the payment of debt owed to local contractors worth N91.7 billion. Recently, FGN indicated interest to raise funds through bonds for funding specific projects such as Methanol plant, revival of textile industry, terminal wages of workers, building of infrastructural facilities, etc.
Features of FGN Bonds
- Denomination: minimum subscription of N50,001,000.00 + 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, 20,30 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.
Debt Management Office Market Wide Development Initiatives
A. The Nigerian Debt Market
Prior to the establishment of the Debt Management Office (DMO) in 2000, Nigeria’s public debt was managed by a myriad of Government Agencies in an uncoordinated manner. This diffusion created systemic and structural problems that brought about serious strain on the country’s debt portfolio and economic growth. The establishment of the DMO marked the beginning of the institutionalization and professionalization of public debt management in Nigeria. In the DMO’s continuous efforts to strategically develop and deepen the FGN Bond market the following initiatives, amongst others, were undertaken:
i. The diversification of holding structure of FGN securities away from the dominance of the CBN, such that the private sector now holds nearly all Government Securities;
ii. The regular issuance of bond in the primary market and the development of active Secondary market for FGN Bonds;
iii. The streamlining and restructuring of the different types of debt instruments through tenor elongation and establishment of sovereign yield curve of 3 months to 20 years;
iv. The appointment of Primary Dealers Market Makers (PDMMs) in 2006: the sustained activities of the PDMMs, such as the provision of a two-way-quotes system has resulted in the creation of a vibrant and liquid secondary market in FGN Bonds;
v. The introduction of Market-based approach to raising finance in the domestic debt market, to meet government’s borrowing needs at a minimal cost and prudent degree of risk; and,
vi. The appointment of a Government Stockbroker to facilitate the diversification of investor base and trading of FGN Bonds on the floor of the Nigerian Stock Exchange.
B. The International Capital Market (ICM)
The DMO also established a visible competitive presence in the International Capital Market (ICM) through its debut issuance of USD500 million (10-year) 6.75 percent Nigeria’s Eurobonds in January, 2011. This was closely followed by the successful issuance of a USD1 billion dual-tranche Eurobonds offering on July 2, 2013, of USD500 million 5-year Bond and USD500 million 10-year Bond at Coupons of 5.125 percent and 6.375 percent, respectively.
The opening of access and establishment of the Nigerian sovereign bond in the ICM have helped to:
- Present Nigeria’s economic status and potentials to the international community;
- Provide foreign investors with requisite market information for investment decisions;
- Establish benchmarks for private sector issuers in the international capital market; and,
- To attract foreign direct investments.
Bond Offer Circular
"Please be informed that you can download the offer documents from the website but you must submit the completed form to any of thePrimary Dealer / Market Maker nearest to you. Thank you."
Download Application Form Below
pdf
August 2016 FGN Bond Offer Circular
(165 KB)
INSTRUCTIONS FOR COMPLETING THE APPLICATION FORM
- Applications must be made only on the official form. Any application made on a newspaper cutting or on Photostat copy of the Application Form will be rejected.
- Applications must be for a minimum of N50,001,000 and thereafter, in the multiples of N1,000. The value(s) of bonds for which applications(s) is/are made and the value of the cheque or Bank draft attached should be entered in the boxes provided
- a. The applicant should insert the caption of the Bond as appropriate for which he is bidding (e.g. 3 rd FGN Bond 2009 Series 1)
- The bid interest rate being offered by the applicant must be set out in the box provided up to 2 decimal points e.g. 10.08% per annum.
- The application form when completed should be lodged with any of the Receiving Agents. Applications must be accompanied by Cheque or Bank draft crossed “FGN BOND OFFER” with the name and address of the applicant at the bank, for the full amount due on application. The cheque or Bank draft should be made payable to the Receiving Agents with whom the application is submitted. All cheques and drafts will be presented for payment on receipt and applications in respect of which cheques are returned unpaid for any reason will be rejected.
- Joint applications must all sign the application form
- An application from a group of individuals should be made in the names of those individuals with no mention of the name of the group. An application by a firm, which is not registered under the Companies and Allied Matters Act, should be made either in the name of the proprietor or in the name of the individual partners. In neither case should the name of the firm be mentioned.
- An application from a corporation must bear the corporate body"s seal and be completed under the hand of a duly authorized official who should state his designation.
- An application from a pension or provident fund must be in the names of the individual trustees unless the trustee is an incorporated company.
- An application by an illiterate should bear his right thumb print on the application form and be witnessed by an official of the Bank or Stockbroker at which the application is lodged who must first have explained the meaning and effect of the application form to the illiterate in his own language. Above the thumb print of the illiterate, the witness must record in writing that he has given this explanation to the illiterate in a language understandable to him and that the illiterate appeared to have understood the same before affixing his thumb impression.
- The applicant should not print his signature. If he is unable to sign in the normal manner he should be treated for the purpose of this Offer as an illiterate and his right thumbprint should be clearly impressed on the Application Form.
How to invest in FGN Bond
How do I buy FGN Bonds?
Primary Debt Market: FGN Bonds Auctions Exercise is carried out by the DMO on a monthly basis. Primary Dealer Market Makers (PDMMs) empaneled by the DMO in 2006 are responsible for submitting bids for themselves and on behalf of their clients at the Auctions.
Secondary Debt Market: Trading in FGN Bond is done on a daily basis in the Secondary debt market by licensed broker-dealers (banks and stockbrokers) on the floor of The Nigeria Securities Exchange (NSE) and on FMDQ OTC Securities Exchange. The PDMMs are obligated to provide a two-way quote for FGN Bonds. This means that you can buy or sell your FGN Bonds whenever the need arises.
Who are Primary Dealer Market Makers (PDMMs)?
PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds. Their major functions are to:
- Take up, market and distribute the Primary Issues of FGN Bonds.
- Make markets in FGN Bonds on request, through the provision of continuous and effective two-way quotes to all PDMMs and non-PDMMs on demand and in all market conditions. Click here to view a list of the PDMMs institutions.
Requirements to buy FGN Bonds
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Application forms can be obtained from any of the authorized dealers (PDMMs), or download from the DMO's website New FGN Bond Tender Form
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Complete the application forms and submit through any of the PDMMs.
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Common-price auction system is normally employed as opposed to multiple price auctions.
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Payments for the allotment are payable in full on application.
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Minimum of N50,001,000.00 and multiple of N1,000.00, thereafter.
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Investors can also access the FGN bonds after the Auctions in the secondary market through any of the broker-dealers on the FMDQ OTC Trading Platform or through Stanbic IBTC StockBrokers on The Nigerian Stock Exchange (NSE).
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FGN bonds purchase is confirmed by electronic registration in the Central Bank of Nigeria’s Scripless Securities Settlement System or by issue of certificates, where required.
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Interest is paid semi-annually until the maturity date when the principal amount is repaid.
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Payment of interest is through issue of interest warrant (cheque) or direct transfer to current or savings bank accounts of the investor.
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Bond holders who do not want to hold the bonds until maturity date can sell them at any time on the floors of the NSE or through, FMDQ OTC Trading Platform.
FGN Bonds FAQs
What is a bond?
A bond is a contract of debt with which an investor loans money to a borrower, usually Government or Corporate organisation. The investor or holder of the bond is the lender. When you purchase a bond, you are lending money to a Government (Federal, State, Local Government Council, and Federal/State Agency) and Corporation, known as the issuer. The Government uses the proceeds from the bonds issued to fund budget deficit or to fund infrastructure projects in the economy. When you purchase a bond, in return the issuer promises to pay you a specified rate of interest (the coupon) during the life of the bond and to repay the face value of the bond (the principal or the original amount invested) at maturity.
What is Nominal Value of a Bond?
The nominal value of a bond is also known as the principal or the original or face value of a bond when it was first issued. It is the total amount upon which the issuer of the bond pays interest and is also the amount which must be repaid at the expiration of the tenor of bond, that is, at the maturity date.
What is a Coupon?
A coupon is the periodic interest (annual or semi-annual) which the issuer pays to the bond holders, which is generally fixed at issuance and expressed as a percentage of the bond’s face value. Hence, bonds are often called fixed income instruments.
What is a Yield?
A bond yield is the amount of return an investor will realize on a bond or the current market interest rate for bonds. The yield of a bond is inversely related to its price, as the market price of a bond increases, the yield falls and vice versa.
What does Yield, Dirty and Clean Price mean?
Yield, the market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond’s yield or rate of return. The market price of a bond may include the accrued interest since the last coupon date.
The price including accrued interest is known as the “dirty price”, while the price excluding accrued interest is the “clean price”.
What is Maturity Date?
Maturity date is the day on which the issuer repays the principal amount or face value plus all outstanding accrued interests. The issuer has no more obligations to bond holders after repayment on the maturity date.
What is Accrued Interest?
Accrued interest is the amount of interest that has accumulated on a bond since the principal investment or last interest payment date. For financial instruments, such as bond, interest is calculated and paid in pre-determined interval (annually or semi-annually).
What is the difference between a Bond and a Stock?
The main difference between stocks and bonds is that stocks represent an ownership interest in the issuing entity while bonds are a form of debt in which the issuer promises to pay the principal amount at a specific date. Another major difference is that stocks pay dividends to the owners only if the issuer declares profit. In the case of bonds, the issuer of a bond is obligated to repay the principal amount at maturity date and also pay interest to the bold holders at a set interval (annual or semi-annual). If you buy a bond and hold it to maturity, you know exactly how much you are going to get back. That is why bonds are also known as ‘fixed-income’ securities. The buyer of stocks or shares in a company has purchased part of the equity and becomes part–owner. He is only entitled to dividend declared by the company when it makes profit.
Types of Bonds
• Sovereign Bond (such as FGN Bonds)
When you buy FGN bonds you are lending money to the Federal Government of Nigeria for a specified period of time. The FGN Bond is considered as the safest form of investment because it is backed by the ‘full faith and credit’ of the government. They have no default risk, meaning that it is virtually certain your interest and principal will be paid as and when due. The income you earn is exempted from State and local taxes.
• State and Local Government Council Bonds (Sub-National Bonds)
When you purchase State Government or Local Government Council Bonds you are lending to the issuers who promise to pay you a specified amount of interest and return the principal to you on a specific maturity date. Such bonds are usually backed by an Irrevocable Standing Payment Order (ISPO) guaranteeing deductions from the State’s share of revenue from the Federation Account into a Sinking Fund established for the repayment of the bond.
• Government Agency Bond
These are bonds issued by Government agencies to raise money for financing of specific projects. These bonds do not carry the full-faith and credit of government. However, investors always hold them in high regard because they are issued by a government agency.
• Corporate Bond
Corporate Bonds are debt securities issued by the private sector. When you purchase corporate bonds, the corporation promises to return your money, or principal at maturity date, but you are being paid interest semi- annually. The interests you receive are taxable except there is tax exemption approved by the Government. Corporate bonds do not give you an ownership interest in the issuing corporation.
Are there Risks and Rewards in Investing in Bond?
Any time you lend money you run the risk that it will not be paid back – credit risk. Another source of risk for certain bonds (bond with call option) is that your money may be paid back before the maturity date, this is known as prepayment risk. When you buy a bond, the prospectus will indicate whether a bond is callable. The risk for a buy–and-hold bond to an investor is rising inflation rate – inflation risk. A rise in inflation makes prices fall and yields or interest rates to rise. However, inflation risk, credit risk and prepayment risk are all considered into the pricing of bonds, the more the risk the higher the yield. Investors demand higher yields for longer maturities, since the longer you tie your money up in a bond the more you are at risk.
Why should I invest in FGN bond?
- Retirement Purposes.
- Starting or expanding a business.
- Settlement after apprenticeship.
- Pay children school fees in future(e.g for University education).
- Building a house or the development of a capital project.
- Future projects by town unions, associations, student union.
- To fund future social events such as as weddings, graduation ceremonies.
- Settlement of pension insurance obligation( for Corporate Fund Managers).
What is the attractiveness/benefits of FGN Bonds to the investors?
- It is a risk-free investment.
- The income earned (interest payments) are tax exempt.
- It provides relatively high and stable returns when compared to the conventional bank deposit.
- The principal element, which is to be collected at maturity can be used as collateral for securing credit facilities from financial institutions such as banks.
- Bondholders that want cash can trade the bonds on the floors of the NSE and FMDQ OTC Securities Exchange for immediate cash before maturity.
- It qualifies as liquid assets for banks in the estimation of their liquidity ratios by the CBN.
What are the benefits of FGN bonds to the Economy?
- It fosters economic development by promoting the use of lon-term funds for lon-term investment in the economy.
- It serves as an efficient way of mobilizing domestic financial resources for productive investment in a non-inflationary manner.
- It provides alternative source of funding to the Government, promotes self-reliance and reduce over dependence on external finance.
- It helps investors to diversify their portfolio and enhances stable return on their portfolio.
- It serve as an efficient and effective way of mobilizing funds for infrastructural development with the multiplier effect of promoting economic diversification.
- It helps to facilitate financial inclusion.
- It promotes fiscal discipline of the Government.
- It helps government funds its budget deficits in a non-inflationary manner by reducing resort to ways and means provided by the monetary authority to the Government.
- It provides benchmark yield-curve for pricing other debt securities/bonds.
- It provides the basic infrastructure for the development of the financial system and the overall economy.
- It strengthens the implementation of monetary policy by the Central Bank of Nigeria.
- It enhances transparency, discipline and stability in the public finance management of the country.
Who are Primary Dealer Market Makers (PDMMs)?
PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds. Their major functions are to:
- Take up, market and distribute the Primary Issues of FGN Bonds.
- Make markets in FGN Bonds on request, through the provision of continuous and effective two-way quotes to all PDMMs and non-PDMMs on demand and in all market conditions. Click here to view a list of the PDMMs institutions.
Who is Government Stockbroker?
A Government stockbroker is a broker appointed by the Federal Government to provide liquidity for FGN Bonds on the floor of the NSE so that investors, especially retail investors, who wish to buy or sell FGN Bonds can do so. The DMO appointed Stanbic IBTC Stockbrokers Limited (SISL) as the Government Stockbroker in 2012 to carry out the following functions:
- Act as an intermediary between the DMO, NSE, Stockbrokers and other market participants to ensure that all activities in FGN Bonds, and other FGN Securities that may be listed in the future, are effected smoothly.
- Provide prices for FGN Bonds on the floor of the Exchange so that investors, especially retail investors, who wish to buy or sell FGN Bonds can do so.
Who are the Regulators and Government Agencies in the FGN Bond Operations?
Debt Management Office (DMO): DMO is the Agency statutorily authorized by law to issue FGN Bonds on behalf of the Federal Government of Nigeria. The DMO also regulates the activities of the bond market and the Primary Dealer Market Makers.
Central Bank of Nigeria (CBN): The Central Bank of Nigeria acts as the Issuing House and the Registrars for FGN Bonds.
The Nigerian Stock Exchange (NSE): FGN Securities are listed and traded on the Floors of the Nigerian Stock Exchange mainly by retail investors.
Financial Market Dealers Quotation (FMDQ) OTC Plc.: FGN Securities are listed and traded on the OTC Trading Platform of FMDQ mainly by wholesale investors.
Central Securities Clearing Systems Ltd (CSCS): Acts as the depository of the bonds listed on the Nigerian Stock Exchange. Investors who opted for physical certificates at the issue must have their certificates deposited in CSCS before transactions on them on the floors of the Nigerian Stock Exchange and FMDQ OTC Securities Exchange.
Securities and Exchange Commission (SEC): The apex regulator in the Nigerian Capital Market; it regulates the activities of all capital market operators as far as operations and their transactions in the market are concerned.
What is Dematerialization of Bond Certificates?
It is a term which describes a shift from issuance of physical certificate to use of electronic entry to indicate the holding of individuals and enterprises in any bond issuance. It involves the use of a depository.
Although DMO still issues physical certificates on request, modern securities trading system de-emphasizes the use of physical certificates. Advancement in electronic communication and custodian services allow book-entry records and trade verification which has made trading more reliable and easier to manage than the use of physical certificates.
How can I be aware of the forthcoming Bond issues?
- The DMO conduct Monthly Auction on behalf of the Federal Government of Nigeria and the notice is placed in National Dailies and the DMO Website, 7 days prior to the date.
- Quarterly FGN Bond Issuance Calendar is on the DMO Website.
- You can also consult your financial advisers for more information.
