January 29, 2022


Accounting + Finance Blog

State Bonds meaning and key Explanations

State Bonds meaning and key Explanations

State Bonds is a type of bond I need to discuss here. This bond is issued by a state government. One of such bonds is the Lagos state government bond issued in 2012 and 2013. The state government issued these debts to meet certain obligations. Let us discuss this.

Meaning of State Bonds

State bonds are a type of bond issued by the state government of a country. It is different from federal bonds that are issued by the federal government. This type of debt is a source of income to the state government. And can be used to meet several obligations. Like building roads, housing, and so on.

Key Explanations

It is issued by the state government. This is done through the bond market. For example, the Lagos state government bonds were issued through FMDQ. FMDQ is the official bond market in Nigeria. Also, this debt capital is available in the Nigeria Exchange Group.

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State bonds are senior debts. That means they are giving more priority than other debt fundings. Therefore, the state government will repay the interest along with the principal at due dates before any other form of debt is paid. Senior debts also imply lower risks. Lower risks mean lower returns to the bondholders.

This debt funding is used to meet the obligations of the government. There may be a need to construct roads and bridges to link cities to villages. Or building low-cost housing units. The funds may be channeled to other obligations as well.

Coupon rates for this debt are small because they are risk-free. These rates are paid every three months throughout the life of the bond. Most these debts are long-term debts ranging from 5 to 10 years. And the face value is 1000 Naira for a unit.

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In summary, State bonds are used by the government to meet obligations like the construction of roads, bridges, and the building of low-cost housing estates. They are senior debts and therefore carry a low-interest rate.