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Bonds Investment is another Alternative
- By Kasimu Kurfi
- Published September 14th, 2009
- Smartmoney
- Unrated
THE issue of bond is one that should be looked at with all seriousness.
Why are more states and companies coming out with bonds? Guaranty Trust Bank just concluded its annual general meeting and got an approval for a N200 billion bond, First Bank also got approval during its AGM and as today UBA is calling for an extra-ordinary general meeting for an approval of another N500 billion bond.
Today, banks in particular are rushing for bond rather than equities. This is for obvious reasons. Because of the meltdown that was experienced in the market last year and is being experienced this year a lot of investors may not like buy ordinary shares. What they want is bond.
What is bond?
Buying a bond means the investor is lending money to the issuer and this money is going to be paid back to the investor at the time of termination or liquidation of the bond. At the interval, the investor would be enjoying what is called bond yield or interest. This interest is fixed.. Irrespective of the market or the performance of the company they must keep to their bond.
Bonds are of different types. A bond issued by the federal government is called the federal government bond and there is also the state bond. There is also the municipal bond or local government bond. These could be revenue bonds whereby the proceeds would be used in generating revenue, or for special services. Bonds issued by private companies either manufacturing or banking is also called debentures.
Investors should look carefully at the issuer of a bond. Bonds have attachment with the issuer and the reliability of the issuer and their previous antecedents matter to the quality of the bond. A company issuing a bond must have a good record of paying dividend as at when due.
For an investor to invest into a bond, he or she needs to look at the quality of the issuer. The integrity of the issuer is one important factor to consider. Not only that, the investor should also look at the coupon rate because the longer tenure, the higher rate. Bond that is issued in three to five years has less rate bond than issue in 10 years or 20 years.
What are the risks associated to bonds?
The risks associated with bonds are many. One of the risks is interest rate. If the bond is issued at the fixed rate of say 13 per cent, 15 per cent, 12 per cent or 12 per cent, that rate would remain the same throughout the tenure of the bond.
Therefore if there are changes in the market rate, assuming the market rate goes lower as is being witnessed now, holding the bond will be better for the investor just as some investors are holding on to federal government bonds that have 15 per cent interest rate. Looking at the market now, interest rate is low, even the inter bank rate is less than 12 per cent. The monetary policy rate (MPR) is just about six per cent. So investing in a bond that can give 15 per cent yield would be better for an investor at a time like this and the investor would be getting more as returns on investments than he or she would ordinarily have.
However if the interest rate in the market is rising then it would not be favorable for the investor. Assuming an investor has interest in a bond that has 12 per cent interest rate and the market rate is 15 per cent then he is at a disadvantage.
But now that the interest rate is going down and with the strategy and policy being put in place by the Central Bank there is an assurance that in the next two years interest rate would be in single digit and therefore those who decide to invest in a bond that have double digit interest rate would be better for it as long as the bond continues to yield returns.
We are also looking at the interest rate in the sense that today most of the bonds that are issued have double digit rate and the inflation rate as at today is 11 per cent or even less than that. That means the investor is also mitigating against the inflation. For those who decided to go for bond now, I think, the return rate is better because they are mitigating against the inflation rate.
Why are more states and companies coming out with bonds? Guaranty Trust Bank just concluded its annual general meeting and got an approval for a N200 billion bond, First Bank also got approval during its AGM and as today UBA is calling for an extra-ordinary general meeting for an approval of another N500 billion bond.
Today, banks in particular are rushing for bond rather than equities. This is for obvious reasons. Because of the meltdown that was experienced in the market last year and is being experienced this year a lot of investors may not like buy ordinary shares. What they want is bond.
What is bond?
Buying a bond means the investor is lending money to the issuer and this money is going to be paid back to the investor at the time of termination or liquidation of the bond. At the interval, the investor would be enjoying what is called bond yield or interest. This interest is fixed.. Irrespective of the market or the performance of the company they must keep to their bond.
Bonds are of different types. A bond issued by the federal government is called the federal government bond and there is also the state bond. There is also the municipal bond or local government bond. These could be revenue bonds whereby the proceeds would be used in generating revenue, or for special services. Bonds issued by private companies either manufacturing or banking is also called debentures.
Investors should look carefully at the issuer of a bond. Bonds have attachment with the issuer and the reliability of the issuer and their previous antecedents matter to the quality of the bond. A company issuing a bond must have a good record of paying dividend as at when due.
For an investor to invest into a bond, he or she needs to look at the quality of the issuer. The integrity of the issuer is one important factor to consider. Not only that, the investor should also look at the coupon rate because the longer tenure, the higher rate. Bond that is issued in three to five years has less rate bond than issue in 10 years or 20 years.
What are the risks associated to bonds?
The risks associated with bonds are many. One of the risks is interest rate. If the bond is issued at the fixed rate of say 13 per cent, 15 per cent, 12 per cent or 12 per cent, that rate would remain the same throughout the tenure of the bond.
Therefore if there are changes in the market rate, assuming the market rate goes lower as is being witnessed now, holding the bond will be better for the investor just as some investors are holding on to federal government bonds that have 15 per cent interest rate. Looking at the market now, interest rate is low, even the inter bank rate is less than 12 per cent. The monetary policy rate (MPR) is just about six per cent. So investing in a bond that can give 15 per cent yield would be better for an investor at a time like this and the investor would be getting more as returns on investments than he or she would ordinarily have.
However if the interest rate in the market is rising then it would not be favorable for the investor. Assuming an investor has interest in a bond that has 12 per cent interest rate and the market rate is 15 per cent then he is at a disadvantage.
But now that the interest rate is going down and with the strategy and policy being put in place by the Central Bank there is an assurance that in the next two years interest rate would be in single digit and therefore those who decide to invest in a bond that have double digit interest rate would be better for it as long as the bond continues to yield returns.
We are also looking at the interest rate in the sense that today most of the bonds that are issued have double digit rate and the inflation rate as at today is 11 per cent or even less than that. That means the investor is also mitigating against the inflation. For those who decided to go for bond now, I think, the return rate is better because they are mitigating against the inflation rate.
