What is a bond?
A bond is a type of investment where an investor loans money to a borrower, typically a government or corporation. When you purchase a bond, you are essentially lending money to the issuer. The issuer uses the proceeds from the bonds to fund various projects or initiatives. In return, the issuer promises to pay you a specified rate of interest (the coupon) throughout the life of the bond and to repay the face value of the bond (the principal or the original amount invested) at maturity. Bonds are often used as a means of generating income or diversifying an investment portfolio.
What is the nominal value of a bond?
The nominal value of a bond, also known as the principal or face value, refers to the total amount on which the issuer pays interest and is also the amount that must be repaid to the bondholder at the bond’s maturity date.
What is a coupon?
A coupon is the periodic interest payment made by the issuer of a bond to the bondholder. This payment is generally fixed at the time of issuance and is expressed as a percentage of the bond’s face value, which is why bonds are often called fixed-income instruments.
What is a yield?
A bond’s yield refers to the return that an investor will receive from the bond, which is usually expressed as a percentage of the bond’s current market price. The yield of a bond is inversely related to its price, meaning that as the price of a bond increases, its yield decreases, and vice versa.
What do yield, dirty price, and clean price mean?
The yield 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 of a bond including accrued interest is known as the “dirty price,” while the price excluding accrued interest is the “clean price.”
What is the maturity date?
The maturity date of a bond is the day on which the issuer repays the principal amount or face value of the bond, plus all outstanding accrued interest. After the maturity date, the issuer has no further obligations to the bondholders.
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. It is calculated and paid in pre-determined intervals (annually or semi-annually) for financial instruments such as bonds.
What is the difference between a Bond and a Stock?
The main difference between stocks and bonds is that stocks represent ownership 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. Stocks pay dividends only if the issuer declares profit, whereas bonds pay interest at a set interval and the principal amount at maturity. Bonds are also known as ‘fixed-income’ securities as they provide a fixed return on investment.
What are the types of Bonds?
Bonds can be classified into different types based on the issuer. Sovereign bonds, like FGN bonds, are issued by the federal government, and State and Local Government Council bonds are issued by state or local governments. Government Agency bonds are issued by government agencies to finance specific projects, and Corporate bonds are issued by private sector companies to raise capital.
What are the risks and rewards of investing in bonds?
Any time you lend money, there is the risk that it will not be paid back. Bond investors also face prepayment and inflation risks. However, these risks are factored into the bond pricing, with higher risk bonds offering higher yields. Bond investments can provide a stable return on investment and can be used to diversify a portfolio.
Why should I invest in FGN bonds?
Investing in FGN bonds can be a good option for retirement planning, starting or expanding a business, paying for future expenses such as school fees or weddings, building a house or funding capital projects. The risk-free investment offers relatively high and stable returns, tax-exempt income, and can be used as collateral for securing credit facilities.
What are the benefits of FGN bonds to investors and the economy?
- FGN bonds provide a risk-free investment opportunity with tax-exempt income and can be used as collateral for loans.
- They also promote long-term investment in the economy and alternative sources of funding for the government, promoting self-reliance and reducing over-dependence on external finance.
- FGN bonds help investors diversify their portfolios, promote financial inclusion, and provide benchmark yield-curve for pricing other debt securities/bonds.
- They also enhance transparency, discipline, and stability in public finance management while strengthening the implementation of monetary policy by the Central Bank of Nigeria.
