DEMYSTIFYING BONDS

Bonds are legal instruments used by Governments (Federal, State and Local), Companies and other entities to borrow money from the public.

The entity borrowing money by way of a bond is called the issuer and the person investing is the buyer.

The issuer of a bond promises to pay the buyer interest, which is called a coupon for the privilege of using the buyer's money. The issuer also promises to return the money, which is the principal to the buyer on a specified date. This is called the maturity date.

The coupon which, is a predetermined interest amount, is paid to the buyer at periodic intervals, throughout the life of the bond. It is this nature of known periodic interest amount (coupon) and known principal amount that gave rise to the nomenclature 'fixed income securities' given to bonds.

Why opt for Government Bonds?

If you are an investor looking at investing money for a period longer than 1 year, or tend to have deposits or placements that have been running for more than a year, Government bond investment will likely suit your investment appetite.

Government bonds provide a desirable savings or investment vehicle for many reasons. They tend to be safer than stocks because if you hold bonds until the maturity date, you don't risk the principal. However if you need to sell your bond before its maturity date, you may lose or gain a bit depending on the ruling price at the point of exit. Without exiting prematurely, Government bonds provide a regular, steady source of income (typically, interest payments are received every 6 months).

Advantages of Government Bonds are:

· They pay higher interest rates than savings accounts.

· They offer a relatively safe return of principal.

· They often have less volatility (price fluctuations) than stocks, especially short-term bonds.

· They offer regular income.

· They are sold in small Naira amounts (N10, 000.00).

· They need less careful attention in management than other alternative investments.

· They are exempted from federal income taxes and possibly from state and local income taxes.

· They are a good way to diversify a portfolio and help to meet investors' income objectives.