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Whether you are
just starting out in your career, saving for your children’s education,
a new home, or approaching retirement, investing in bonds can help you
achieve your objectives.

“My name is Bond”

When you purchase a
bond, you are lending an amount of money to a company, a state or
federal government or other issuer for a set period of time. In return,
you are guaranteed a fixed income, a coupon, payable in two equal,
semi-annual instalments. The borrower also agrees to repay the face
value or principal of the bond when it matures.

For example, if you
invest a face value of N1,000,000 in a five year bond paying a coupon
rate of 10% per year, assuming you hold the bond to maturity, you will
receive ten coupon payments of N50,000 each, a total of N500,000. At
maturity, the issuer will pay you back your N1,000,000 face value.

Diversification

To reduce the risk
that any one asset-class may pose to an overall portfolio, it is
recommended that investors maintain a diversified investment portfolio
consisting of bonds, stocks and cash, depending upon the investor’s
particular circumstances and objectives. Bonds play an important role
in a well-balanced portfolio and it makes sense to include them in your
portfolio.

Bonds are issued in
a range of tenors, from short term issues with one to five year
maturities, to medium term of five to ten years, and over ten years for
long term bonds. One may opt to “ladder” your bonds, buying several
with staggered maturity dates timed for when a cash need arises for
say, children’s education or retirement.

Bonds offer flexibility

Although bonds are
issued for a specified period of time, investors do not have to keep
the bond until maturity. An investor may need cash for some purpose or
interest rates may have risen since the bond was issued. Indeed “call”
and “put” provisions make it possible for investors to buy and sell
them ahead of maturity, trading them like shares.

Individual Bonds versus Bond Funds

As an investor you
can choose between investing directly in a bond or in a bond mutual
fund. The main advantage of a bond mutual fund is its convenience. A
professional fund manager will usually make better investment choices
than the average individual investor. In addition, a bond fund offers
liquidity, competitive yields, and diversification across a range of
bonds including government and corporate bonds, euro bonds and money
market instruments. For smaller investors, a fund provides an
opportunity to invest, as individual bonds are usually sold with
minimum volumes.

Bonds and Risk

Even though they
offer reliable fixed income, bonds are not risk free. When you invest
in bonds, you face three risks, the risk of default, inflation, and of
interest rate fluctuations.

Default risk is the
chance that the issuer, be it a government or a corporation, will be
unable to repay your money. Bonds offer a wide range in choice from the
very safe Federal Government Bonds with an AAA rating, which are
virtually risk-free as they are backed by the full faith and credit of
the Federal Government, to corporate bonds.

Rating agencies,
such as Agusto & Co, Fitch and Moody’s assign ratings to bonds, are
based on in-depth analysis of the issuer’s financial condition and
management, as well as other criteria. Such ratings, which are
periodically reviewed, help to give investors an idea of how likely it
is that a payment default will occur. As risk and reward go hand in
hand, an investor that has an appetite for greater risk might select
high yield bonds for the ensuing higher returns.

The value of a bond
fluctuates with changes in market interest rates. When interest rates
fall, bond prices rise, and when interest rates go up, the prices of
bonds go down. If you are holding a bond issued at 6% and interest
rates increase to 8% on comparable, newly issued bonds, your bond
decreases in value, as there would be no incentive for anyone to buy
your bond at the price you paid. As with all fixed income securities,
inflation is a major risk as it erodes the purchasing power of future
coupon payments.

Are bonds for you?

If you are looking
for income rather than growth but need a better return than you get
from cash, then government or corporate bonds are a good option. Even
though stocks usually provide a higher return over the long-term, high
quality bonds, will offer safety and stability. This is particularly
useful for investors who have a relatively short time frame within
which to invest including those approaching retirement and whose
priority is for a predictable stream of income to meet living expenses
and the preservation of their principal.

There is no hard
and fast rule about how much to invest and which bonds to invest in.
Your needs and goals change over your life cycle reflecting your age,
your investment objectives, your investment horizon and your risk
tolerance level. Whether you are just starting out in your career,
saving for your children’s education, for a new home, or approaching
retirement, investing in bonds can help you achieve your objectives.
Visit a primary dealer, your broker or investment advisor who will help
you select a bond that best suits your needs.

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and if selected, may be edited.