What is a Bond?
A bond is a form of loan that provides the borrower with external funds to finance long-term investments. In the case of government bonds, they are used to finance current expenditure.
Just like stocks, bonds are securities but a major difference between them is that stockholders own equity in a company while bondholders are just lenders in the company. As a result, bondholders have priority over stockholders.
Another difference between the two is that bonds have a defined time when they mature and are redeemed while stocks remain indefinitely outstanding.
Think of bonds as a situation where a company or a government takes out a loan directly from an individual where the individual acts as a bank. The individual loans to an organization, or, the government – and they are required to pay that individual back, with regular interest payments. A city may sell some bonds to raise money for specific operations like building a bridge, while the federal government may issue bonds to tackle debt related issues.
Bonds are as safe investments and as such, are appealing to Nervous investors. Bonds can generate a steady stream of income for these individuals, even when the stock market becomes volatile.
That doesn’t mean bonds are risk-free. Some bonds can be highly risky, as well. There are different kinds of bonds that offer different options to investors.
For instance, you can redeem some bonds before their agreed-upon maturity date, while some bonds can be switched for shares of a company. Bonds have their unique levels of risk, and their credit rating can determine these risks.
Types of Bonds in Nigeria
1. Treasury Bonds
The federal government issues treasury bonds. They are the safest bonds you can find; although this is dependent on the country issuing bonds.
When compared with other types of bonds, treasury bonds possess the lowest yields. This is because they are somewhat safe, and you know what they say, the safer your assets, the lower the returns.
2. Municipal Bonds
These are bonds that the state government and local government issued. They are for financing capital expenditures such as the building of schools, construction of bridges, hospitals, etc.
3. Corporate Bonds
When companies need capital to boost their business operations, they issue corporate bonds. Compared to municipal and treasury bonds, corporate bonds have more credit risks. This is because corporate bond defaults happen more frequently than the aforementioned bonds.
Corporate bonds can comprise investment-grade and speculative-grade.
4. Asset-Backed Securities
Financial assets back these bonds. These financial assets are put together and then resold as bonds to interested investors.
Why do Bonds matter?
Bonds, as well as other types of fixed-income securities, play a significant role in an investor’s portfolio. In return for interest payments.
Possessing bonds can help you to diversify your portfolio because the bond market hardly rises or falls alongside the stock market. Also, bonds are known to be safer and less volatile than stocks.