Are bonds a good investment option?

Well, the simple answer is yes.

The more complex answer depends on what other options are available – this is when things like interest rate are considered, especially when compared to other investment options also, the types of bonds, the duration of the investment, and then your risk tolerance.

So, is the federal government’s savings bond a good investment option?

The straightforward answer is yes.

What the federal government of Nigeria has on offer is N1,000 per unit subject to a minimum subscription of N5,000.00 and in multiples of N1,000. After this, it will be subject to a maximum subscription of N50,000,000.00. 

The risk levels of this bond are low, and it has returns of 7.54% over 24 months and 8.54% per annum over 36 months. It also has a quarterly payment date on April 19, July 19, October 19, and January 19. 

To understand the opportunity available here, one must first understand what exactly bonds are.

Bonds are loans taken by a government from investors. These investors buy the government’s bonds. 

In exchange for the money invested, the government will pay interest coupons. This is the annual interest rate paid on a bond expressed as a percentage of the face value (7.54% over 24 months or 8.54% over 36 months). 

The government pays the interest at already agreed intervals (quarterly in this case). The principal (money investors gave to the government) will then be paid back on the maturity date. This payment will mark an end to the loan. 

To better understand the current FGN bond, a look at https://www.dmo.gov.ng/fgn-bonds shows that The FGN must pay the bondholder the principal and agreed on interest as and when due. When you buy FGN Bonds, you are lending to the FGN for a specified period. 

The FGN Bonds are considered the safest of all investments in the 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.

Conclusion:

This is an investment opportunity that is guaranteed to pay back according to the stipulations of the agreement. These bonds can be bought through any registered stockbroker. 

While these bonds do not meet the textbook definition of “secured bond” because it doesn’t come with collateral. The ‘full faith and credit’ of the government serves as enough assurance.

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