FGN Savings Bond: Another Alternative Way to Save

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If you are considering an alternative way of saving to earn higher returns than what you will normally get from your regular savings account with your bank, then the FGN Savings Bond may just be what you need.  In case, you do not know, a bond is a financial instrument with which an entity borrows money from the public. 

It is more or less a promissory note or an IOU in which the entity admits that it owes the lender a certain amount and undertakes to pay the entire debt at a particular future date. The borrowing entity is known as the Issuer.

Now the issuer of a bond can be a national government, state government or local government and/or their agencies.  It can also be a business organization or public corporation.  A bond issued by a national government is known as Sovereign bond, bond issued by state governments are called sub-national bond while bonds issued by local governments are known as municipal bonds.  Bond issued by business organizations and public corporations are called corporate bond.

Governments borrow money by issuing bonds to finance budget deficits, build infrastructure and maintain existing ones.  Corporations on the other hand can issue bond to raise fresh capital, undertake business expansion, build more factories or rehabilitate existing plants.

When you invest in a bond you automatically become a creditor to the issuer and you are entitled to periodic interest payment. You will also receive a promise to be repaid the face value of the bond at maturity.

The Federal Government of Nigeria issues different types of bonds to meet different objectives.  The most common is the FGN Bonds which are issued for long term ranging from 5 years to 10 years and there is possibility that 20 to 30 year bonds may be in  issue in time to come. There is also the Euro Bond which is denominated in foreign currency and is targeted at global institutional investors; the Diaspora Bond which is also foreign currency denominated is targeted at Nigerians in Diaspora.

The Bonds issued by the federal government usually have long duration or maturities, sometimes for as long as 20 years.

However, in March 2017, the government introduced the FGN Savings Bond in response to market demands.  The FGN Savings Bonds have shorter duration of between 2 – 3 years and pays higher interest rates (coupon).  The FGN Savings Bond is the focus of this post

What You Should Know About the FGN Savings Bond?It is a retail bond product introduced by the Federal Government of Nigeria to enable the low income segment of the society to participate in funding government infrastructural projects by investing in the bond market.  In doing so, it also provides an alternative window for low income earners to save money and get attractive returns on investment.

How Is FGN Savings Bond Issued?

The FGN Savings Bond is issued monthly by the Debt Management Office in tenors of 2 and 3 years.  The offer for subscription is usually opened for five working days and the interest rate or coupon is determined by the DMO. 

Coupon Rate

This is the interest payable on bonds and as highlighted earlier, for the FGN Savings Bond, the coupon is determined by the DMO based on prevailing market indices. Interests on these bonds have ranged between 13 – 14 percent for the two-year bond and the three-year bond respectively. These rates beat what you ordinary will earn on your savings or even a fixed deposit account.  With inflation now at 11 per cent and trending further down, the FGN Savings Bond offer attractive return on investment.

What Is the Minimum Amount I can Invest

Minimum subscription to the savings bond is N5,000 and in multiple of N1,000 subsequently while maximum you can invest is N50 million.

Benefits of Investing in FGN Savings Bond

You get all the benefits derivable from investing in bonds.  When you invest in a bond, you earn a stream of income in the form of interest payments that are paid periodically until maturity.  The interest you receive is not taxable, meaning more income to you and you can use your investment as collateral to take loans from commercial banks.  Bonds are also liquid because a strong secondary market exists where you can trade your investment if you do not wish to hold to maturity. 

With the FGN Savings Bond you have a better alternative to your regular savings account because the FGN Savings Bond pays you better interest than you can get from the commercial banks and the interests are paid quarterly

You can use the FGN bond to save and plan towards important projects such as marriage, retirement, rent, school fees and house projects.

Like the sovereign Bond, the FGN Savings Bond is safe and virtually risk-free as it is backed by the full faith and credit of the Federal Government of Nigeria.  It also provides a window for the ordinary Nigerian to start saving and investing money in order to become financially free.

As the minimum investment in Treasury Bill have been increased significantly, FGN Bond becomes the most viable alternative to retail investors who are desirous of making money with fixed income investment.  If you take the decision to now to start investing specific  amount in the FGN Savings Bond every month, you would be amazed at the amount of wealth you are able to build in a year’s time.

How to Invest In the FGN Savings Bond

The first step towards investing in the FGN Savings Bond is to open a CSCS Account through your stockbroker.  If you already have an account for your equities investment you need not open another one for in one CSCS account, both your equities and bond can be cleared.

The Debt Management Office (DMO) which issues the FGN Savings Bond on behalf of the Federal Government accredits stock brokers to participate as distribution agents in the monthly auctions.  You can get a list of DMO accredited stock brokers from its website and decide on the one to deal with.  DMO updates the list as more stock broking firms are enlisted. 

In choosing a stock broker, it is pertinent you ask if the firm is approved by DMO as distribution agent for the FGN Savings Bond if you to desire to invest in bond.

You will go through the normal account opening process, supplying relevant KYC data and your bank details.  The broker will guide you on what is on offer and when.  Give your instruction, make fund your account and have your broker purchase the bond for you.

You can also sell whenever you want if you do not wish to hold the bond to maturity.  Your broker will take your instruction and sell on the Nigerian Stock Exchange which is the secondary market for the FGN Savings Bonds. 

It is important to note that when you sell your bond before maturity on the secondary market you may not get the full face value because of the effect of fluctuating interest rate.  When interest rate is high, bond price gets low and vice versa.  Therefore, what you will realize when you sell your bond before maturity will largely depend on the prevailing interest rate.

Last Words

The Federal Government saving bond is designed to create  a win-win situation for the government and the ordinary Nigerian.  With this bond, the government is able to mobilize fund from a diverse segment of the society to be able to fund deficits in budgets and build infrastructure while at the same time provide a viable option for the ordinary Nigerian to not only participate in funding government projects but also using it as window to save, invest and create personal wealth.

So if you are earning the minimum wage and are desirous of building wealth for yourself and children even with that minimum wage, or you are one who is desirous of saving, growing your income and diversifying your investment portfolio, why not consider the FGN Savings Bond.

Buchi creates content and leads the Team at Kobotalk Management Services; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.

6 Comments on “FGN Savings Bond: Another Alternative Way to Save”

  1. I’ve been looking for an informative explanation like this for a very long time. God bless you Mr. Buchi!

    I would like to have a private chat with you if you don’t mind

  2. Thanks alot Buchi, the post is very educative. Please how can I locate a Dmo approved agent in My area?

    1. Glad you got value. Basically, DMO distribution agents are stockbroking firms approved by the Office to sell its bond issues. So look for a stock broking company your area and ask if they deal in bonds.

      You can download a comprehensive list of distribution agents from DMO website.

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