By BABAJIDE KOMOLAFE

We concluded the last edition by saying that there is primary market and secondary market for bonds. Before explaining the process of buying bonds in each market, it is important to state that the prices of bonds fluctuate at the secondary market.

Usually, bonds are sold at N100 per unit when they are issued. Assuming you invest N10, 000 to buy 1000 units of five year bond paying 10 per cent interest rate, if by the third year, you urgently need the N10,000 such that you are willing to sell the bonds to any willing buyer, you may have to sell at a price below the N100 per unit you bought the bond, especially given that you have collected 10 per cent interest rate for two years (i.e. N2,000).

Also if interest rate in the economy has risen to say 15 per cent, the bond will become less attractive compared to other investment like fixed deposit and savings, hence investors would be willing to pay lesser price for the bond than the N100 per unit at which it was sold to you.

Note that the reverse is the case if interest rates fall to say five per cent. But remember that the price fluctuations only affect those that want to sell their bonds before maturity date. They do not affect bond holders that wait till the bonds mature before they get their money back.

How to buy bonds

When governments or companies want to borrow money by selling bonds, they do so through an agent organisation or an organisation called the Issuing House, which markets and sells the bonds on behalf of the bond issuer. As stated in the last edition, the most dominant bond in Nigeria and also frequently issued is the Federal Government Bond of Nigeria.

While FGN Bonds are issued by the Debt Management Office, the Central Bank of Nigeria acts as the Issuing House and Registrar. Furthermore, there are 13 banks and five discount houses appointed as primary dealers and market makers for FGN Bonds.

Whenever DMO wants to issue FGN Bonds, it announces it through newspaper adverts. Also on its website, it publishes a calendar for bonds to be issued in a year. The last bond issuance by the DMO was held on June 12, 2013, and the next would be conducted on October 17th 2013.

To buy or subscribe to the bond offer, you need to obtain, complete and submit the application forms, through any of the primary dealers (13 banks and five discount houses). You can also download the form from the website of DMO (http://www.dmo.gov.ng).

Payment for the units of bonds you want to buy is to be made through the primary market dealer. After the offer, the bonds are registered in your name with the Central Securities Clearing system (CSCS). The interest rate on FGN bonds is paid semi-annually (twice a year) until the maturity date when the principal (amount invested) is paid back.   The process is similar for state bonds and corporate bonds.

If you want to buy bond or sell your bond before maturity, you have to do so through the stock market and for this, you need the services of a stock broker. You will be given an Order form, in which you will indicate the type, unit of bond you want to buy and at what price. The process is very similar to that of buying shares in the secondary market.