January 29, 2022

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Federal Government of Nigeria (FGN) Bonds meaning and Key Explanations

Federal Government of Nigeria (FGN) Bonds meaning and Key Explanations
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The federal government of Nigeria issues bonds in the local and international debt market from time to time. FGN bonds are usually low-interest bonds. And are lower than the inflation rate of Nigeria. Let’s discuss this in detail.

Definition of Federal Government Bonds

FGN bonds are a type of debt issued by the Debt Management Office (DMO) on and for the federal government for a period range of between a minimum of 2 and a maximum of 50 years.
It can also be defined as debt securities issued by a government agency (that is, the DMO) on behalf of the federal government of Nigeria and are risk-free.

Key Explanations

FGN bonds are issued by the Debt Management Office (DMO). To illustrate, if the federal government needs finance through bonds, it requests the DMO to issue these bonds. And the debts are sold using the domestic or international debt market. FMDQ is known to have lists of FGN bonds. Here is a screenshot of bonds listed in FMDQ and their current coupon rate and market value.

FGN bond is a type of bond. I have discussed other types of bonds. Secured, government bonds, Sukuk bonds, corporate bonds are just a few of them. FGN and Sukuk bonds are examples of government bonds. They are issued through DMO. You can buy this bond through a Nigeria mutual fund. A mutual fund is a basket of several securities including debt capital.

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If you acquired a portion of this bond you become a creditor to the federal government of Nigeria. That means the FG owes you an obligation to pay the principal sum along with the interest attached to it.

FGN bonds are issued for two years maturity periods. Most of these debts issued by DMO have three years and at most ten years maturity periods. In addition, DMO hopes that in the future, it will issue debts for up to 15, 20, and 30 years maturity periods.

The debts are also risk-free. This means that the Federal Government will pay the principal and the interest at the due date. There has never been a time FG default in paying back this obligation. As a result, FGN bonds coupon rates are lower than other types of bonds.

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Other Features of FGN Bonds

It can be issued as a monetary policy measure. For example, if the central bank of Nigeria (CBN) wants to increase the money supply it buys back FGN bonds from the public. And if it intends to reduce the supply of money, it sells these debts to the private sector.

Most of these debts are issued for a special purpose. In 2006, debt capital was issued to pay pension arrears of 75 billion. In the same year, another FGN bond was issued to pay contractors. This debts capital can also be issued to meet infrastructural deficits, for repayment of previous debts and other capital projects.

DMO may also issue zero-coupon bonds. This type of bond does not have any interest rate attached to it. This implies that every quarter, the holder will not earn any interest. However, interest and principal amounts are paid at maturity.

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The minimum subscription allowed here is N50,001,000.00. And a multiple of N1,000.00 thereafter. This is why they are issued to banks and finance houses in the first instance. Then these financial institutions will make them available to the public. They are also issued in debt markets like the FMDQ and the Nigerian Exchange Group.

Conclusion

FGN bonds are issued on behalf of the federal government of Nigeria through DMO. Their interest rates are much lower than other types of bonds. The reason is that it is risk-free. They are issued to meet specific needs such as payment of debts owed to contractors among others. More so, the bond has a minimum maturity period of two years and a maximum period of 50 years.

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