Frequently Asked Questions

	What are Bonds?
	Why invest in Bonds?
	How to invest in FGN Bonds
	Why you should invest in FGN Bonds
	Key Bond investment considerations
	Fundamental Bond investment strategies
	Strategies for investing

WHAT ARE BONDS?

A bond is debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, corporation, federal agency or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures”, or becomes due. Among the type of bonds you can choose from are: FGN Bonds, State Government Bonds, Corporate bonds, mortgage and asset-backed securities, federal agency securities and foreign government bonds.

WHY INVEST IN BONDS?

Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks, bank deposits and cash in varying percentages, depending upon individual circumstances and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital or to receive dependable interest income. Whatever the purpose - saving for your children’s college education or a new home, increasing retirement income or any of a number of other financial goals – investing in bonds can help you achieve your objectives.

HOW TO INVEST IN BONDS

Until July 2006, all banks, discount houses and stock brokers used to be agents of the Debt Management Office (DMO) for individual or corporate investment in FGN Bonds. However, this has changed with the appointment of the 15 Primary Dealers and Market Makers in government securities. Consolidated Discounts Limited is one of the privileged few that are the agents of DMO for all Federal Government of Nigeria (FGN) Bonds to be issued from July 2006.

WHY YOU SHOULD INVEST IN FGN BONDS

Some benefits of investing in FGN Bonds are:

	High and Stable Returns (yearly yield as high as 18.25%)
	Free from Default Risk (100% assurance of interest and principal repayment)
	Tax-Free Income (not subject to CIT, WHT or VAT)
	Collateral for Borrowing
	Qualifies as Liquid Assets (in computing liquidity ratios of banks and other financial institutions)
	Easily Tradable (you can divest at anytime before the maturity date)

KEY BOND INVESTMENT CONSIDERATIONS

There are a number of key variables to look at when investing in bonds. Some of the variables are:

	Maturity
	Redemption features
	Credit quality
	Interest rate
	Price and yield
	Tax status

Together, these factors help determine the value of your bond investment and the degree to which it matches your financial objectives.

FUNDAMENTAL BOND INVESTMENT STRATEGIES

As you build your investment portfolio of fixed-income securities, there are various techniques you and your investment advisor can use to help you match your investment goals with your risk tolerance.

Diversification

No matter what your investment objective, it makes good sense to diversify your portfolio. Diversification can provide some protection for your portfolio, so if one sector or asset class is in the midst of a downturn, the rising value of another class of assets may help offset the negative impact.

Laddering

Another diversification strategy is to purchase securities of various maturities. When to buy bonds with a range of maturities a technique called laddering, you are reducing your portfolio’s sensitivity to interest rate risk. If, for example, you invested only in short-term securities, the kind that is least sensitive to changing interest rate risk, you would have a high degree of stability, but you might be giving up yield. Conversely, investing in long-term securities may result in greater returns, but their prices will be more volatile, exposing you to losses if you have to sell before maturity. Building a laddered portfolio involves buying an assortment of bonds with maturities distributed over time.

Barbell

This strategy also involves investing in securities of more than one maturity to limit your risk against fluctuating prices. But instead of dividing your money in a series of bonds distributed over time, as with laddered portfolio, you’d concentrate your holdings in bonds with maturities at both ends of the spectrum, long- and short-term – for example, bills or notes maturing in six months or a year, and 20- or 30-year bonds.

Bond Swap

Investors use bond swap to realize a variety of benefits. A swap, the simultaneous sale of one security and the purchase of another, may be done to change maturities, upgrade the credit quality of the portfolio, increase current income or achieve a number of other objectives. The most common swap is done to achieve tax savings. Anyone owning bonds selling below their purchase price and having capital gains or other income which could be partially, or fully, offset by a tax loss can benefit from a tax swap.

In a two-step process, the investor would sell a bond that is worth less than what he paid for it and would simultaneously purchase a similar bond at approximately the same price. By swapping the securities, the investor has converted the paper loss to an actual loss which can be used to offset capital gains.

STRATEGIES FOR INVESTING

How do you make bonds work for your investment goals? Strategies for bond investing range from a buy-and-hold approach to complex tactical trades involving views on inflation and interest rates. As with any kind of investment, the right strategy for you will depend on your goals, your time frame and your appetite for risk.

Bonds can help you meet a variety of financial goals such as preserving principal, earning income, managing tax liabilities, balancing the risk of stock investment and growing your assets. Because most bonds have a specific maturity date, they can be a good way to make sure that the money will be there at a future date when you need it.

Bond Basics Glossary

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