In response to my piece on “this may be a great time to buy bonds”, one of my readers sent me a personal mail asking to understand the difference between clean and dirty price when it comes to bond investing. Like I often do, when I receive emails on something I think demands public or general consumption, I prefer to respond with articles rather than an email to a single reader so that all my beloved readers can benefit from the question asked. That is the reason for this article.
In stock investing, when companies declare dividends, they set up a date to close the books. The implication of this process is that if your name is not in the company register as at the date of book closure you will not receive the dividend. From that date, the shares of the company are marked ex div, meaning without the dividend. Prior to that date, the shares are marked cum div, meaning cumulative or with dividend.
This implies that anyone buying the share during the cum div period will pay two prices, the regular price of the share and the dividend amount because as at the record date when the book closes, the seller’s name would have been expunged from the register. In order not to lose the dividend declared before the sale but payable after the sale, the buyer has to buy the shares at the cum div price.
That principle applies to bonds also but bonds do not pay dividends rather they pay interests. Unlike dividends that depend on the decisions of the board of directors of a company, interest payments are contractual and obligatory. In that case, one knows how much interest one is required to receive from a particular bond at each interest payment date.
However, for proper accounting, the interests are accrued on a daily basis until payment date. Not everyone holds a bond till maturity and not everyone holds a bond till the interest payment date. When bonds are sold between coupon dates, the seller needs to be compensated for the accrued interest for the period he held the bond. This is where the issue of clean and dirty price comes into play.
A bonds clean price is the price of a bond without accrued interest. It is to bonds what ex-date price is to stocks. On the other hand, the dirty price of a bond is the clean price of a bond plus accrued interest. It is to bonds what cum div price is to stocks. If you are lucky to buy a bond on the interest payment date, you will be faced with just one price because the clean and dirty prices are the same because all accrued interest have been paid.
[Read Also: Difference Between Coupon And Yield]
It may not be apparent if the quoted prices are clean or dirty, so you need to find out from your broker or bank but if you know the yield to maturity of a bond and you are mathematically inclined, you can easily apply discounted cashflow analysis for the valuation of any bond using the formula to figure out the price.
The above formula calculates the clean price of a bond, so, if your calculated price matches the quoted price, at least, approximately, then the quoted price is clean. Note that in the above formula, C represents coupon payment, F represents the face value of the bond, t is time to maturity while r is the yield to maturity.
[Read Also: Investing in Nigerian Bonds – A Beginners Guide]
Even if you are not mathematically inclined, bonds can be easily valued with excel spreadsheets using the formula PRICE(settlement, maturity, rate, Yld, redemption, frequency) where settlement is the day your bond trade settles, maturity is the maturity date of the bond, rate is the coupon payment, yld is yield to maturity of the bond, redemption is the face value and frequency is how often the bond pays interest in a year, 1 for annual, 2 for semiannual and 4 for quarterly pay.
How are Bond Prices Quoted in Nigeria?
Analysis by Quantitative Financial Analytics Ltd indicates that most Nigerian bonds quoted on FMDQ website are priced or quoted clean as the table above shows.
[Read Also: Nigeria Sterling Bank H1 2019 Earnings Update]
DMO offers N150 billion worth of FGN Bonds for subscription
FGN Bonds are backed by the full faith and credit of the Federal Government of Nigeria.
The Federal Government on Tuesday, 11th August 2020, through the Debt Management Office (DMO), offered for subscription Federal Government Bonds (FGN Bonds) valued at N150 billion.
The FGN bonds are listed in four tranches that include:
- N25,000,000,000 – 12.50% FGN JAN 2026 (10-Yr Re-opening)
- N40,000,000,000 – 12.50% FGN MAR 2035 (15-Yr Re-opening)
- N45,000,000,000 – 9.80% FGN JUL 2045 (25-Yr Re-opening)
- N40,000,000,000 – 12.98% FGN MAR 2050 (30-Yr Re-opening)*
Auction Date: August 19, 2020
Settlement Date: August 21, 2020
Summary Of The Offer
Issuer: Federal Government of Nigeria (“FGN”)
Units Of Sale: N1,000 per unit subject to a minimum subscription of N10,000 and in multiples of N1,000 thereafter.
Interest rate: For Re-openings of previously issued bonds, (where the coupon is already set), successful bidders will pay a price corresponding to the yield-to-maturity bid that clears the volume being auctioned, plus accrued interest from the original issue date.
Interest payment: Payable semi-annually.
Redemption: Bullet repayment on the maturity date.
- Qualifies as securities in which trustees can invest under the Trustee Investment Act
- Qualifies as Government securities within the meaning of Company Income Tax Act (“CITA”) and Personal Income Tax Act (“PITA”) for Tax Exemption for Pension Funds amongst other investors
- Listed on the Nigerian Stock Exchange
- All FGN Bonds qualify as liquid assets for liquidity ratio calculation for banks
Security: FGN Bonds are backed by the full faith and credit of the Federal Government of Nigeria and are charged upon the general assets of Nigeria
Understanding Bonds: A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
A bond could be thought of as an I.O.U. between the lender and the borrower that includes the details of the loan and its payments.
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A bond has an end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments that will be made by the borrower.
DMO announces August 2020 FGN Savings Bond offer for subscription
The FGN Savings Bond is backed by the full faith of the Federal Government of Nigeria.
The Debt Management Office (DMO), on behalf of the Federal Government of Nigeria, recently offered for Subscription the August 2020 Federal Government of Nigeria Savings Bond.
The Federal Government of Nigeria Savings Bond is an investment product issued through the Debt Management Office (DMO) on behalf of the Federal Government.
The FGN Savings Bond is backed by the full faith of the Federal Government of Nigeria. As such, it is deemed to hold no default risk (Zero-Based Risk).
This is, therefore, to inform you that the Federal Government of Nigeria Savings Bond offer(s) for the month of August – 2020 has commenced on the 10th of August, 2020. It will close on the 14th of August, 2020.
It consists of two (2) tenors:
2-Year FGN Savings Bond due August 12, 2022: 3.61% per annum
3-Year FGN Savings Bond due August 12, 2023: 4.61% per annum
Please find below additional information to guide your application:
Unit of Sale: N1,000 per unit subject to a minimum subscription of N5,000.00 and in multiples of N1,000.00 thereafter, subject to a maximum subscription of N50,000,000.00.
Coupon Payment: Payable every quarter with principal repayment at maturity.
Settlement Date: August 19, 2020.
Coupon Payment Date: November 19, February 19, May 19, August 19
Security: The Federal Government of Nigeria Savings Bond is backed by the full faith and credit of the Federal Government of Nigeria (FGN).
Debt Management Office resumes FGN savings bond offer on August 10
The DMO assured that the Bond offers were going to resume when the conditions change.
The Debt Management Office (DMO) has announced the resumption of its Federal Government of Nigeria (FGN) Savings Bond Offer with effect from August 10, 2020.
This disclosure was made in a press statement by the Debt Management Office to the general public.
The DMO was earlier forced to suspend the monthly offers of the FGN Savings Bond in April 2020, due to the lockdown and restrictions placed on social and economic activities as part of measures implemented by government to contain the spread of the Coronavirus pandemic.
The statement from the Debt Management Office said:
“The DMO wishes to announce the resumption of its offer of the federal government of Nigeria savings bond (FGN savings bond) effective August 2020.
“The DMO was constrained to suspend the monthly offers of the FGN savings bond in April 2020 due to the restrictions on activities and movement as part of measures adopted by the government to curtail the spread of COVID-19.
“The offer for subscription will open on Monday, August 10, 2020 and close on Friday, August 14, 2020.’’
The statement also encouraged investors to continue to save through the FGN Savings Bond. This is because FGN Savings Bonds attract good returns and are secure, being a Sovereign instrument. They also contribute to national development.
Nairametrics had on April 4, 2020, reported the suspension of the FGN Savings Bond offer by DMO which was scheduled for April 6 –April 10., due to the restrictions caused by the coronavirus pandemic.
The DMO assured that the Bond offers were going to resume when the conditions change.
The DMO, however, noted that the suspension of the April 2020 Offer would not affect Coupon Payments due to investors for already issued FGN Securities, as arrangements had been made to ensure that all Coupon Payments for and redemptions of FGN Securities were made as and when due to investors’ designated accounts.