BY BABAJIDE KOMOLAFE
Having explained what investment in bonds is about, and the basic merit last week, we proceed to discuss how to buy and sell bonds. But before this, it is important to know that there are also risks to investment in bonds. The greatest risk is inflation, general increase in prices of goods and services.
Assuming you invest N10, 000 in a five year bond, the reality is that within those five years, prices of goods and services may have risen significantly such that what N10, 000 can buy at the time you invested in the bond, you may need N15, 000 to buy it by the fifth year when the bond matures.The implication is that though you get your money back with interest, but the value is not the same.
There is also the risk that the bond issuer may have problem repaying the bond. Though this risk is minimal or almost non-existent in government bonds, it could happen if it is a company that issued the bond. Also there have been instances where governments had difficulty repaying their loans. A good example is Greece, which has been under severe economic problem in the last three years. So take note that investment in bonds has its risk and this depends on the type of bonds.
With respect to type of bonds, the basic ones are Sovereign bonds, State bonds, Municipal bonds, and Corporate bonds.
Sovereign bonds are issued by the federal governments, while state bonds are issued by state or regional governments. local government bonds are issued by local government, and corporate bonds are issued by companies. Corporate bonds are also referred to as Debenture or Industrial loan. The most important thing is that they are all debts.
In Nigeria the most dominant type of bond is the Sovereign bond also known as FGN Bond. Total value of FGN Bond outstanding (yet to be paid/or yet to mature) is N3.5 trillion as at December 31st, 2012.
Like equities/shares, there is primary market and secondary markets for buying and selling of bonds The primary market is where bonds are issued and sold by the issuer directly to the investing public, while the secondary market is where bond holders can sell the bonds, and willing investors can buy such bonds.
The importance of the secondary market for bonds is that if you buy bonds, and you need money before the tenure of the bond expires, you can take it to the secondary market and sell. Also if there are no fresh issuance of bonds i.e. government or companies are not selling bonds, but you want to invest in bonds, you can go to the secondary market and buy from bond holders willing to sell.
In Nigeria, bonds are also listed and traded on the Nigeria Stock Exchange. For example, last week, 1,770 units of FGN bonds valued at N194, 830 were traded in 15 deals on the stock exchange.