Are you an investor hoping to diversify your investment portfolio in 2018 or, a beginner seeking information where to put your money? Do you have money but lack requisite information on the businesses you can do in Nigeria to create wealth? Then follow me as I take you through the “INVESTORS CHOICE SERIES”, where I will be discussing the various investment opportunities in Nigeria ranging from bonds, stocks, mutual funds, Treasury bills, fixed and term deposits, and other lucrative businesses you can invest in to create wealth among which are Real Estate, Farming (Poultry, Fish and Snail), Eatery and restaurant business, Bottled water product, packaging and marketing, web designing etc.
Every week, I will be giving you basic information to arm yourself with when next you are thinking of buying any investment instrument or venturing into a business.
Before I let you in on today’s investment choice, it will be good to let you know what an Investment is.
An investment is the time, money and energy you put into something with the hope of making income and profit in the nearest future. The essence of any investment is to get back more than what you have invested (Return on Investment). Therefore, the surest way to have this dream accomplished is by taking the right decision and doing the right things.
“Price is what you pay. Value is what you get.”- Warren Buffett
Having defined Investment in its simplest form, I will be discussing “Bond”. What it is? Its characteristics, and benefits.
What is Bond?
A bond is an agreement between the lender (bond holder) and the issuer to borrow money, where the issuer is obligated to pay the principal face value and interest at an agreed later date. The interest rate also referred to as coupon rate, is the return the bondholders earn for lending their monies to the issuer.
Bonds are usually issued by corporate organizations and Government to raise fund to execute specific projects instead of approaching a bank for a loan. Interests on bonds are paid on quarterly or annual basis.
It is generally believed that Government bonds are the safest, because it is not likely a government will collapse, and in exceptional cases of inability to fulfill obligation of payment by government, the option of raising taxes to cover debt payment is available.
Most corporate and government bonds are traded on the floor of the Nigerian Stock Exchange.
What you should know about Bond?
- Bond does not make you a shareholder in the business. Unlike stocks, where ownership rights are transferred to shareholders, bond is a loan you give to the issuer, expected to be paid back with interest within a given period.
- The two major determinants of a bond interest rate are ; credit quality and duration. These two major factors play huge roles on how interest is set for bonds issued.
An issuer with poor credit rating, run the risk of default in interest payment as and when due, therefore tend to have higher interest rates than stable funds as government bonds. Also, due to the risk associated with bonds that have longer maturity dates, they generally offer higher yields to make them attractive to potential buyers, while bonds with higher quality and shorter maturity dates offer lower interest rates.
Terms you should be familiar with when buying bond;
- Coupon rate – this is the rate the bond issuer will pay on the bond, usually calculated in percentage. For example, a 10% coupon rate means that bondholders will receive 10% x ₦1000 face value = ₦100 every year. The rate does not usually change once the bond is issued.
- Maturity date – this is the expected date the bond issuer is expected to pay the face value of the bond to the holder. It could be quarterly or annually.
- Face value – this is the amount the bond will be worth at maturity. This is also referred to as “Par” value. Most bonds in Nigeria have a face value of N1,000.
- Issue prize – this is the original prize the bond was sold by the issuer.
Benefits of investing in bond
if your risk appetite is low, then investing in bond will be a perfect option for you
- Risk of losing money especially in government bonds is near zero
- It saves you the consequences of the volatility that characterize other investments such as stocks
- It gives you a stream of income and help diversify your investment portfolio
- Interest rates on bonds are usually not affected by the fluctuation in the stock market
Note that information provided is to guide you to take an informed decision on your investment. For further details on how to invest and tenures available in Nigeria, contact your banker or broker.