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]
NB Plc to raise additional N20 billion from its N100 billion Commercial Paper
Nigerian Breweries has announced the continuation of its N100 billion Commercial Paper (CP) Issuance Programme.
Nigerian Breweries has announced the continuation of its N100 billion Commercial Paper (CP) Issuance Programme in a bid to raise up to N20 billion to support its short term funding needs. The company has launched Series 9 and 10 of the programme for this purpose.
This information was disclosed in a notification signed by the Company’s Secretary, Uaboi G. Agbebaku, and sent to the Nigerian Stock Exchange.
The notification reads;
“[Nigerian Breweries Plc] is pleased to inform the Nigerian Stock Exchange and the investing public of the continuation of its “CP” (Commercial Paper) programme with the launch of Series 9 and 10 of the programme.
“Series 9 of the Commercial Paper programme would be for a tenor of 180 days, while Series 10 would be for 270 days. However, the launch of the CP opens today 23rd October 2020.”
What you should know
According to data obtained from Financial Market Dealers Quote (FMDQ), Nigerian Breweries has raised up to N90.12 billion since the start of the year.
- N52.76 billion was raised from Series 6 between February 12 to November 6, 2020.
- N13.03 billion was raised from Series 7 from April 15 to October 14, 2020.
- N24.33 billion was raised from Series 8 from April 15 to January 8, 2021.
- The recent issuance of the Series 9 and 10 CP will bring the total funds raised to N110.12 billion.
Why it matters
- The CP will help the company navigate through the recent impact of COVID-19 and other trade disruptions.
- The programme will strengthen the balance sheet of the company, and enable the brewer to execute its plans while delivering value to customers and creating wealth for shareholders,
- In like manner, the CP programme is expected to provide opportunities for non-equity investors to invest in the company and support its cost management initiatives.
Commercial Paper value appreciates by N243 billion YOY, hits N539.8 billion in H1, 2020
Commercial Paper value appreciated by 81.9% to N539.8 billion in 45 issuances as of H1, 2020.
Commercial Paper value hits N539.8 billion as of June 2020, as the value appreciated by 81.9% from N296.8 billion in 44 issuances as of H1, 2019 to N539.8 billion in 45 issuances as of H1, 2020. This is according to a recent report by PWC titled, “Nigeria Capital Market Update.”
As regards industry spread, the financial services sector accounted for 32% of the proceeds raised as of H1 2020, followed by the consumer goods sector representing 26% of total proceeds. ICT raised 19% and Industrial goods contributed 18%.
In terms of yearly appreciation, Commercial Paper value has maintained an upward trend, recording N114 billion as of the end of 2016, N221 billion in 2017, N402 billion in 2018, and N540 billion in H1, 2020.
What this means
Activities in the Commercial Paper market maintained its upward trajectory as more blue-chip companies continue to access short term funding from a diversified investor base, through the capital market and on favorable terms.
What you should know
Commercial Paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities typically last several days and rarely range longer than 270 days.
It is usually issued at a discount from face value and reflects prevailing market interest rates.
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Nigerian Treasury Bills drop to 2% per annum
The latest data from Nigeria’s Treasury bill auction shows that Nigeria’s 364-day reduced by 2%.
The latest data from Nigeria’s Treasury bill auction shows that Nigeria’s 364-day reduced by 2%. On the other hand, Stop rates moderated slightly for the 91-day tenors and 182-day tenors. The 91-day bills had stop rates of 1 % and 182-day bills also went by 1%.
At the auction, the Debt Management Office (DMO) sold N12.76 billion on the 91-day paper, N4.5 billion on the 182-day, and N107.6 billion on the 364-day bill despite huge demand from Investors.
What you need to know
Basically, when the government goes to the financial markets to raise money, it can do it by issuing two types of debt instruments – Treasury Bills and Government Bonds. Treasury bills are issued when the government needs money for a short period, while Bonds are issued when it needs debt for more than say five years.
- The issuance of treasury bills is also used as a mechanism to control the circulation of funds in the economy.
- Treasury bills have a face value of a certain amount, which is what they are actually worth.
- However, they are sold for less. For example, a bill may be worth N10,000, but you would buy it for N9,600.
- Every bill has a specified maturity date, which is when you receive the money back.
- The government then pays you the full price of the bill (in this case N10,000), giving you the opportunity to earn N400 from your investment. The amount that you earn is considered as the interest, or your payment for lending money to the government.
- The difference between the value of the bill and the amount you pay for it is called the discount rate and it is set as a percentage.
What they are saying
Peter Omoregie, CFA, Head Proprietary Trading at CardinalStone Partners Limited, in a phone interview with Nairametrics, explained why investors oversubscribed Nigeria’s Treasury bills in spite of low rates.
“The CBN continues with de-leveraging its balance sheet and favoring its growth policies over the attraction of FPI money, which is good for businesses and the country at large. Surprisingly, we had a huge subscription on the long end at these low rates. The local institutional investors are addicted to Tbills like a junkie on cocaine, they don’t know how or when to stop.”
Why this matters
The massive disparity between the subscriptions and the offers recorded suggests investors are willing to earn a negative real return, compared to the higher risk in other assets such as stocks and real estate. Basically, the CBN sells T-bills on a bi-weekly basis to investors and it is one of the safest investments available. Interests are paid upfront and the principal paid in full upon maturity.
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