The Nigerian Money Market
in financial institutions, bond are referred to as long term promissory note on which a borrower promises to make payments of interest and principal on specific dates to the lender.That is, the bond is a financial instrument used only by the government or incorporated public liability companies to raise long term funds.
The need for bond issue may come up when a borrower needs large sum of money that will be in use for a very long period of time and which could not be obtained from short or medium term sources. When such situation arises, the borrower will sell the bond issue to any willing buyer such as an individual, financial institution, insurance companies and other investors. Thus the buyer of the bond lends his money to the body that issues the bond and then he becomes a bondholder with entitlements of regular interest payments on the money lent.
On the maturity date of the bond he turns in the bond to the issuer and then collects back his principal amount so invested on it. Interest on the bond is paid periodically as agreed, to the bondholder as and when due from the Nigerian Stocks And Bonds. It is only the principal amount that waits until the maturity of the bond to be repaid to the bondholder. The bond indenture contains the formal agreement between the bond issuer and the bondholder.
A trustee is appointed between the bondholder interests which are protected and that the terms of the indenture are carried out. Restricted covenant that constraint the actions of the borrower may be inserted in the indenture. A call provision may also be included in order to give the bond issuer the right to redeem the bond under specified terms prior to the normal maturity date. The call provision is important because a borrower can sell a new issue low yielding bond when interest rate drops and use the proceeds to retire bonds issued when interest rate were high.
Sinking fund provision can be made. This requires the borrower to retire a portion of the bond issue each period or year. The sinking fund deposit may be deposited with the trustee who invests it and uses the accumulated sum to retire the bonds when the mature. Alternatively, the borrower may be give the right to handle the sinking fund in either of the two ways namely, to call in for redemption a certain percentage of the bonds each year, or to buy the required amount of bonds in the open market.
The borrower chooses the least cost method. If interest rate has risen, causing bond prices to fall, it is better for the borrower to buy back the bonds in the open market at discount. If interest rate has fallen, causing bond prices to rise it is better to call in the bond for redemption. The bond indenture also contains the ace value that is per value of a Nigerian Stocks And Bonds, the interest rate applicable and the term or maturity date.
Then on the maturity date the principal coupon is ready is surrendered for redemption. Mortgage bond is a bond backed by property of the issuer. It can be first, second, third mortgage. First mortgage bond is superior in priority to claims of the second mortgage bond and so on that order. Debenture bond is unsecured bond on the sense that it is not backed by any property but simply secured only the reputation of the issuer for meeting its obligations.
It can be subordinate or insubordinate debenture. Subordinate debenture is a type of debenture that has claims on assets only after the senior or insubordinate debt has been paid off in the event of liquidation. Convertible bonds are the type that can be converted into shares of common stock at a fixed price, at the option of the bond holders. Bond that type of bond that is issued with a warrant give the holder options to buy a stated number of shares of common stock at a specific price.
Where no such convertibility is allowed it becomes unconvertible bond. Income bond is a bond that pays interest to the holder only when the issuing firm makes profit. Putable bond is a bond that can be turned in and exchange for cash by the holder if the issuer takes some actions that negate the indenture. Purchasing power indexed bond is a bond has interest payments based on inflation index so as to protect the holder from the effect of inflation.
The interest rate can be set at inflation rate plus real return percent. This type of bond is suitable for countries plagued with high inflation rate. Zero coupon or discounted bond is one that is sold at a discount, pays no interest but rewards investors by payment of the bond’s face value on maturity date. This way the holder makes holder makes gain through capital appreciation. Floating rate bond is a bond that has its interest rate varied with the shits in the general level of interest rates at the Nigerian Stocks And Bonds.
Junk bond is a high risk, high-yielding bond. Redeemable bond is one with a maturity date while irredeemable bond is one without a maturity date (in essence perpetual bond). Per value (or face value) of a bond is the original price set by the issuing company at the time a bond is first sold to the public.
Advantages Of Bond To The Company Issuer are;
– Has lower interest rate than bank rate
– Has longer repayment period
– Attracts no los of control since no voting rights
– Interest payments on bond is tax-deductable
Disadvantages Includes the following;
– Adverse public in case of default
– Possibility of appointing a receiver
– On petition for winding up, unsecured creditors are jeopardized on a forced sale.
The parties to the issue of bond are;
– Issuing house
– Reporting Accountants
– Solicitors to the issuer
– Solicitors to the issue
– Soilicitor to the trustees
– Receiving banks
– Receiving agents
Per face value (or face value) of a bond is the original price set by the issuing company at the time a bond is first sold to the public.
Valuation Of Redeemable Bond – Nigerian Money Market
Valuation of a bond is very important if one actually want to know the price he can pay for a bond to actualize the desire yield. To find the price of a bond two things are important;
(1) Finding the present value of the annuity formed by the stream of coupon payment discounted at the market rate of interest (and not the coupon rate)
(2) Find the present value of the bond par value discounted at the market rate of interest (and not the coupon rate).
That is the summation of the present values of all future interest payments computed at marketing ruling interest rate plus the present value of the redemption value of the bond also computed at the market ruling interest rate. This is because of a bond gets two things namely the redemption price and the coupon payments.
If the market or yield rate is higher than the interest or coupon rate paid on the bond, the bond buyer pays a price less than the par value, that is, the bond will be purchased at a discount. If the yield rate is lower than the coupon rate the bond is purchased at premium (in essence more than the par value). An investor who wants a certain yield on a bond with call provision can get the value of the bond working for both redemption on the earliest call date and redemption at maturity.
The lower of the two value would be a safe price to ensure the desired yield. apart from the computed value on bond, the price of a bond depends to a large extent, on the interest rate of the bond, the prevailing market or yield rate acceptable to investors accounts, the time to maturity, and most o it all the degree of safety associated with the particular bond.
Nigerian Money Market – Valuation Of Irredeemable Bond
Irredeemable bond is a bond that last to infinity. It is otherwise called a perpetual bond, hence it has no redemption value (MV) and the interest payment lows to infinity. thus to get the value of this type of bond we simply find the sum of the presents value of all the future interest payments up to infinity.