Analysis: Deal or No Deal? FGN Savings Bond


Nairametrics| The Debt Management Office on behalf of the Federal Government officially launched its FGN Savings Bond Issue on Monday, 13th of March 2017. The much-awaited bond issuance is targeted at retail investors.

We have looked at details of the bonds and as typical do provide our readers information that can help them make informed investing decisions. But before we go to the upsides and downsides of the offer, here are details of the bonds in case you missed it

2-Year FGN Savings Bond due March 22, 2019: 13.01%

Opening Date: March 13, 2017

Closing Date: March 17, 2017

Settlement Date: March 22, 2017

Coupon: 13.01%

ISSUER: Federal Government of Nigeria (“FGN”)

UNITS OF SALE: N1,000 per unit subject to a minimum Subscription of N5,000 and in multiples of N1,000 thereafter, subject to a maximum subscription of N50,000,000.

INTEREST PAYMENT: Payable Quarterly

REDEMPTION: Bullet repayment on the maturity date

Upsides

  • Gives retail investors more options to invest their cash
  • Just about anyone can invest in it
  • The interest rate you get is higher than one bank pays you for savings or fixed deposits
  • It’s good for money you have no plans of using for the next two to three years
  • You don’t have to hold to maturity
  • You can make capital gains if you sell above face value
  • You can use the bond certificate to deposit for a collateral against a loan
  • Very good if the interest you pay for a loan s less than the interest rate paid by the bond

Downsides

  • The interest rate of 13% is below inflation. At a current inflation rate of 18.7%, your real return is -5.8%. That’s the fastest way to erode purchasing power
  • You must wait at the end of 3 months to get your interest
  • The bonds have a minimum of 2 years and maximum of 3 yea repayment. This means you only get your money back at the end of the 2 or 3 years depending on which package you buy
  • Should you want to cash your money back before two years, you’ll have to sell at the secondary market. This might mean losing money, especially when interest rates are high and bond values are low
  • Not good for a short-term investor
  • Not also good for an investor who likes high yield, high return investment

Our view

This is a very tricky proposition and it appears that the DMO has played a fast one. At a coupon of 13% investors will be earnings a rate of return that is well below inflation rate. They have also priced the rate below Treasury Bills rate which they announced can now only be purchased with a minimum of N50,001,000. Also, the FGN Savings bond is also placed at a price point that is above other fixed income rates such as the savings and fixed deposits. So what do you do if you are risk averse, have idle cash that is not up to N50 million and do not want to earn a negative return on it? The deal for you in this case will be to buy the FGN Savings bonds.

At a coupon rate of 13% this appears to be a no deal for us. We will rather invest in stocks or forex trading or any other high yielding investment. We could also purchase Treasury Bills at the second market. However, a word of caution. High returns often come with higher risk and requires that you monitor your investment day and night.

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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