If you join any conversation about investing in Nigeria today, you will quickly notice a shift. The once-familiar talk of “buy land, start a side hustle, or invest in mutual funds and stocks” is now being joined by a quieter, steadier option: bonds.
They don’t trend on X, and they’re not flashy. However, with economic uncertainty becoming the norm, more Nigerians are turning to bonds because they offer structure, good returns, and consistent performance regardless of market turbulence.
In this guide, you’ll learn how Nigeria’s bond market works, which bonds offer the best opportunities for different types of investors, and how you can start building this income stream today.
What are Bonds?
At its core, a bond is a loan, but instead of borrowing money from a bank, you become the lender, and the borrower is a government or a company (also known as the issuer). In return, they promise to pay you interest regularly and return your full investment after a set period.
Think of it like this: If stocks involve owning a piece of a company, bonds are about lending money to that company or the government and getting paid for it. However, compared to stocks, bonds are generally more stable and offer better returns, especially if you’re looking for medium- to long-term options.
Each bond has a face value (the amount you invest), a coupon (the interest rate), and a maturity date (when your money is returned).
Types of Bonds You Can Invest in as a Nigerian
Not all bonds are created equally. In Nigeria, the issuing body, structure, and currency can vary widely. Here are the major types that you can invest in:
1. Sovereign Bonds (FGN Bonds)
These are bonds issued by the Federal Government of Nigeria, and they’re considered the safest option in the bond market. They offer a fixed interest rate with regular interest payments, and your capital is returned at the end of the term. They are backed by the full credit of the government, which means repayment is guaranteed.
2. Corporate Bonds
These are issued by companies that need to raise funds for expansion, projects, or operations. This process is often cheaper for companies than taking a loan from a bank, as it allows them to raise money without giving up ownership. Corporate bonds typically offer higher interest rates than government bonds but come with slightly more risk. If the company struggles financially or fails, bondholders have legal priority over shareholders when debts are paid. The Securities and Exchange Commission (SEC) regulates bonds issued by public companies, which provides additional oversight and investor protection. However, those from private firms are not regulated by the SEC, so due diligence is key before investing.
3. State and Local Government Bonds (Sub-National Bonds)
Some Nigerian states issue bonds to fund projects like road construction or public infrastructure. These are commonly called state bonds, and they are often backed by an Irrevocable Standing Payment Order (ISPO). The ISPO acts as insurance that the federal government will deduct the bond repayments directly from the state’s allocation before it reaches them. This backing gives state bonds additional credibility and lowers the risk for investors.
4. Government Agency Bonds
Government agencies issue these bonds to finance targeted projects like infrastructure development or social programs. These bonds typically carry backing from the relevant government entity and offer returns reflecting their specific risk and purpose.
5. Eurobonds
Eurobonds are Nigerian government bonds issued in foreign currencies, typically US dollars, and sold to international investors. They appeal to investors who want to hedge against naira depreciation or earn dollar-denominated income. However, they come with currency risk, meaning that fluctuations in exchange rates can impact returns. They’re also more suitable for higher-net-worth or more experienced investors.
N.B.: Around the world, you’ll also find specialized bonds like zero-coupon bonds and convertible bonds. Zero-coupon bonds do not pay interest regularly; instead, they repay both principal and interest at maturity. Conversely, convertible bonds allow you to convert your bonds into shares of the issuing company later. These features offer extra benefits but come with added complexity and risks. While they are useful in some contexts, these bond types are not yet common in Nigeria, as they exist in more advanced capital markets.
Benefits of Investing in Bonds
- Steady and predictable income: Bonds provide a regular income stream through interest payments. This makes them ideal for people who want regular cash flow to reinvest, save toward a goal, or support their lifestyle. Corporate and state bonds generally pay higher returns than FGN bonds without excessive risk.
- Lower risk compared to stocks: The risk of losing your capital is relatively low, especially for government-issued bonds. You’re not exposed to the daily price swings of the stock market. Regardless of market conditions, issuers are legally obligated to make interest payments and return your principal at maturity.
- Capital preservation: If you hold a bond to maturity, you get back your principal investment plus all interest payments received during the holding period. This makes bonds suitable for conservative investors or anyone nearing retirement.
- Diversification: Bonds complement riskier assets like stocks. They help balance your portfolio and reduce overall risk, and you can also choose bonds from different sectors or credit qualities to fine-tune your strategy.
- Potential Tax Benefits: Some bonds (especially government bonds) come with tax incentives, meaning your interest income may not be taxed, depending on the structure. These tax benefits can significantly impact your investment performance, especially for higher-income investors.
Risks of Investing in Bonds
Like all investments, bonds carry some level of risk. Here’s what you need to watch out for:
1. Credit/Default Risk
A credit or default risk may occur when the issuer cannot repay the bonds as promised with interest. While FGN bonds carry minimal default risk due to government backing, corporate bonds face real business risks. Companies can encounter financial difficulties and, in severe cases, bankruptcy. Before investing in corporate bonds, research the company’s financial health, debt levels, business model sustainability, and industry outlook. Credit rating agencies provide alphabetical ratings that help assess this risk, ranging from highly safe (AAA) to highly risky (below investment grade).
2. Interest Rate Risk
When interest rates rise, bond prices usually fall. This is only a problem if you need to sell before maturity, as you may sell at a loss. Longer-term bonds are more sensitive to interest rate changes than shorter-term bonds, so a 20-year bond will see bigger price swings than a 2-year bond when rates change.
3. Inflation Risk
If inflation rises faster than your bond’s interest payments, your returns shrink, and your purchasing power may decline over time. This is especially relevant in countries like Nigeria with variable inflation trends.
4. Liquidity Risk
Not all bonds can be sold easily. If you need to exit your investment before maturity and there’s no willing buyer, you might be stuck or forced to sell at a loss. FGN bonds, for instance, are more liquid, but the risk is generally higher for corporate and smaller state government bonds.
5. Call Risk
Some bonds can be redeemed early by the issuer, especially when interest rates drop. This could cut your expected returns and leave you with cash to reinvest at lower returns.
Tips for Investing in Bonds
To make smart bond investments:
- Know your investment goals: Are you saving for retirement, building passive income, or preserving capital? This will help you determine which bonds fit your needs and strategy.
- Understand your risk appetite: Higher returns often come with higher risk. Match your choices to your actual ability to handle potential losses.
- Research the issuer’s credit rating thoroughly: This gives you an idea of how likely they are to repay.
- Know the maturity date: Be clear about when you’ll receive interest and your capital back, and create a calendar to track it. This planning helps manage cash flow and decide whether to reinvest proceeds or redirect them to other users.
- Diversify: Spread your investments across different types of bonds, sectors, and maturity dates.
How to Buy Bonds in Nigeria
You can access bonds in Nigeria through three main channels:
1. Primary Market
The federal government issues FGN bonds monthly via the Debt Management Office (DMO) through public auctions. Bids are submitted by Primary Dealer Market Makers (PDMMs) such as banks and brokers. You can invest by placing a bid through your broker or bank.
2. Secondary Market
The secondary market is where bonds are traded after they are first issued. This market operates daily through licensed broker-dealers like Zedcrest Wealth, with settlements processed through established platforms like FMDQ, CSCS, or the Nigerian Exchange (NGX).
Secondary market prices fluctuate based on interest rate changes, credit developments, and supply-demand dynamics. While prices might vary in face value, the secondary market provides liquidity and access to bonds you missed during initial offerings. You can buy existing bonds at market prices and resell before maturity if needed.
Invest in Bonds Easily with Zedcrest Wealth
Zedcrest Wealth is a licensed broker-dealer in the Nigerian fixed-income market. Through the Zedcrest Wealth app, you can:
- Buy bonds with as little as ₦1,000 via the Zedcrest Fixed Income Fund.
- Access pre-vetted, high-quality investment options.
- Track your investments in real time, and much more.
Rather than directly navigating the complexities of primary dealer relationships or secondary market trading, you can seamlessly access a diversified portfolio of bonds.
In conclusion, bonds offer a practical, stable way to grow your wealth. They deliver predictable income, help preserve capital, and earn consistent returns. Whether you’re looking for the rock-solid safety of FGN bonds or the higher yields available from carefully selected corporate bonds, the key lies in understanding your objectives and making informed choices.
Ready to get started with bonds? Download the Zedcrest Wealth app today on the App Store and Google Play Store and start investing with confidence.
