What Are FGN Savings Bonds and How Do They Work?

Afrinvest
7 min readJun 10, 2022

FGN Savings Bond is a loan to the Nigerian government. It pays investors a fixed rate of return. See how it may work for you.

FGN Savings Bond Explained — Afrinvest

Most of us are already familiar with the concept of borrowing money. Whether it’s collecting a business loan to finance your ideas or taking out a personal loan to buy a car, the loaned amount is usually paid back with interest. Similarly, companies and governments also borrow money, but in their case, they do it by issuing something called bonds.

Bonds are not so different from loans, except that instead of borrowing money from a bank or loan company, an organization or government borrows money from the public.

In simple terms, a bond is a confirmation from a company or government that it borrowed money from an investor at a given interest rate and is repayable over a period. An instrument or document that carries monetary value is issued to the investor in exchange for cash. Think of it as an understanding between the two parties that includes the details of the loan and its payments.

Although there are different ways to invest in bonds, we will focus on FGN savings bonds for this post.

FGN Savings Bond Explained

How does the idea of lending money to the government sound to you? Yes, we mean the Federal Republic of Nigeria. Is it even possible? Well, it is. While some of us might baulk at the idea, many people have been smiling to the bank through this form of investment.

A savings bond is a financial instrument used by the government to borrow money from retail investors. When you purchase an FGN savings bond, the Federal Government of Nigeria is essentially borrowing money from you to execute or finance projects with the promise of paying it back with interest within a fixed period.

Again, think of it as taking out a loan. When you borrow money, you’re given an interest rate that will accrue on the balance until you finish paying off the loan. FGN Savings Bonds work in the same way, except that you are the lender and the government is the borrower, and you can request repayment from the government at any time.

Why is the government issuing a retail bond? The purpose of the initiative is to give ordinary Nigerians of all income groups the opportunity to earn an income through saving and investing. It’s the government’s way of helping Nigerians cultivate a savings culture.

FGN Savings Bonds are often considered one of the lowest-risk investments because they are backed by the full faith and credit of the government. What that means is that you will never lose any of your principal investment. The government has a reputation to protect and will go to any length to pay you back, even if it means minting money. However, because they are low-risk, they also deliver a low return on investment.

Features Of A Savings Bond

In Nigeria, savings bonds are issued monthly by the Debt Management Office (DMO) on behalf of the government via an offer for subscription at an interest rate based on market rates. The rates are announced by the DMO in the first full week of the month. The key features of the bond you should know about include the following:

Interest: The bond earns an investor a coupon or an interest income that is paid every 3 months and directly into the investor’s bank account. For instance, the interest rate for the June 2022 auction is 8.205% for the 2-year bond and 9.205% for the 3-year bond. The coupon or interest income from the savings bond is tax-free.

Transaction charges: There are no transaction costs incurred in buying the savings bond in the primary market. However, charges are applicable for investors when buying or selling a savings bond in the secondary market.

Bond Sales: The bond can be sold at the going rate before maturity through the Nigerian Exchange Limited retail bond market by authorizing your stockbroker to sell your investment in the secondary market.

Investment: The minimum investment amount is as low as N5,000, while the maximum amount is N50,000,000.

Collateral: The bond is acceptable as collateral for loans.

The Difference Between FGN Savings Bonds and FGN Bonds

It is easy to make the mistake of using the FGN Savings Bonds with FGN Bonds interchangeably because the names are similar, the only difference being “savings”.

While both instruments share the same “full faith and credit” guarantee from the government, hence their low-risk nature, they have some peculiarities when compared in terms of interest payment, tenure issued, frequency of issuance, and the minimum amount required to invest.

The Savings Bond is targeted at retail investors to promote the savings culture of Nigerians. FGN Bond, on the other hand, is targeted at individuals or institutional investors with huge capital.

The major differences that stick out between the two are highlighted in the table below:

Difference between FGN Bonds and FGN Savings Bond

How Does the FGN Savings Bond Work?

Savings Bonds work by paying back a regular amount to the investor, also known as a “coupon rate,” and are thus referred to as a type of fixed-income security.

For example, if you invest N100,000 in 3-year FGN Savings Bonds at an interest rate of 8% per annum, you will be paid N2,000 every 3 months for the next 3 years directly into your bank account. That is, you will receive N2,000 for 12 quarters, translating to a total interest of N24,000. You will be repaid your N100,000 with the final N2,000 interest at the end of the third year.

When you want to invest in a savings bond, you will be required to complete and submit a subscription form through a licenced stockbroker. It is crucial to make sure your stockbroker is licenced to avoid losing your investment to unregulated operators. For instance, Afrinvest is the first on the list of accredited distribution agents for the FGN Savings Bond.

Your stockbroker or “distribution agent” will be responsible for opening a Central Securities Clearing System (CSCS) account where the bond will be deposited after purchase. If you already have a CSCS account for stocks, you don’t need to open a new one to invest in savings bonds.

The CSCS is the custodian and transfer agent that assists with the holding of your investment and transmits or updates your bank details to the CBN. The CBN is the Registrar of the Savings Bonds with the responsibility to ensure interest and principal are paid as and when due. As a result, it is mandatory to have a bank account.

How To Make Money From Savings Bonds

There are two ways to make money by investing in bonds:

The first is to hold those bonds until their maturity date and collect interest payments on them. This is called the Primary Market.

The second way to profit from bonds is to sell them at a price that’s higher than what you paid initially. This is called the Secondary Market.

For example, if you buy N100,000 worth of bonds at face value, and then sell them for N150,000 when their market value increases, you can pocket the N50,000 difference.

Getting The Best Out Of Your Savings Bond

If you already have other assets like stocks in your portfolio, a savings bond is a good way to diversify your portfolio and protect yourself from market volatility. Whether you’re the risk-averse type or risk-tolerant, you can build and compound your portfolio with FGN Savings Bonds.

How can you achieve this? You can set a target to purchase a certain amount each month.

For instance, if you invest N10,000 monthly for the next 5 years at an average interest rate of 7.0%, your total savings will be N600,000 with an estimated interest of N119,343.90, translating to a total of N719,343.90. If your monthly target is N50,000 or N100,000, your total estimated investment value will be N3,596,719.50 or N7,193,438.99.

This assumes that you reinvest any interest paid and principal at maturity into your bank account with your monthly contribution (investment can only be made in multiples of N1,000). A simple hack is having a dedicated bank account for this purchase and not your regular bank account.

How to Increase Your Investment

When you have successfully subscribed to a savings bond offer and wish to get more, how will you go about it?

Investors can sometimes need to top up or add to their savings bond portfolio. You can subscribe for more in multiples of N1,000, exceeding a total cumulative amount of N50 million. The process of doing this is as straightforward as the initial investment procedure, with only a small twist.

You can increase your subscription through the secondary market or the regular monthly auction. This will be added to your overall portfolio.

Let’s break that down. Assuming you subscribed to the January 2022 offer and you want more, you can only top it up if you can get the January 2022 offer on the next attempt. If you, for instance, got the February 2022 offer, it won’t be added to the initial January coupon but treated as another savings bond in your portfolio.

Lastly, it is important to note that the price or yield you get in the secondary market might not be the same as in the primary market. That’s because in the secondary market, it is other investors selling off the bonds they bought, not the government directly, and they can decide to offer them at a different price.

The Bottom Line

Doing nothing with your money makes you worse off due to the continued impact of inflation on your savings or investment. With the inflation rate at 16.82% as of April 2022 in Nigeria, investing in savings bonds helps you to reduce this impact by an average of 8% per annum.

By now, you should have sufficient information to help you decide on investing in Savings Bonds. If you have questions, feel free to send them to brokerageteam@afrinvest.com and our investment advisers will be happy to clarify things for you.

Ready to give FGN Savings Bond a try? It’s very easy. All you need to do is click here to download the subscription form and get started.

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