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What are fixed income securities and how do they work?

03 March, 2021 | 4 MINS READ

Two things should come to mind when you read fixed income securities: Preserving the value of the initial capital invested and earning a fixed income on your investment. When you invest in a fixed income security, your capital is preserved as you receive the amount of money you invested at maturity and earn a fixed income based on fixed interest rates known as coupons or dividends.

Most investment options are divided into debt or equity based options. Fixed income securities are classified under debt options based on the fact that you’re basically lending your money to a corporate institution. These fixed securities instruments are typically issued to raise capital to finance long term projects.

In simple terms, a fixed income security is a contract where you loan your money to a third party in return for fixed interest rates or a definite return. Each product under the fixed income umbrella has its upsides and downsides. Some examples of these products include treasury bills, government bonds, corporate bonds and certificate of deposits

Due to the low risk associated with fixed income investments the returns are typically low compared to other securities, therefore, fixed income is perfect for risk averse investors.  If your goal is to earn a steady income over a period, this is the option for you.

Fixed income securities listed on the Nigerian Stock Exchange (NSE), include Federal Government Bonds, FGN Savings Bonds, State/Local Government Bonds, Supranational bonds, Corporate bonds, Green bonds, Sukuk bonds and Eurobonds.

Some key features of fixed income securities include the following;

Face Value

This term is frequently used to represent what a financial instrument or security is worth or used as a means of determining interest payments. The face value of a bond is the price at which it was issued. It is also called the nominal value or par value.

Coupon Rate

The coupon rate is an interest rate that the issuer agrees to pay every year on fixed income security. It is also known as nominal rate, and it is paid every year till maturity.

The method to calculate coupon is fairly straight forward. The coupon is calculated by multiplying the coupon rate by par value (also known as face value) of the bond. The par value of a bond is the amount that the issuer agrees to repay to the bondholder at the time of maturity of the bond.

Coupon Yield

The yield is the rate of return a fixed income security generates on a trading day. If an investor invests in a 5 year fixed income security and decides to sell it before maturity (5 years), when he earns for selling before maturity is the current yield on the fixed income security.

Fixed income securities in Nigeria offer competitive returns compared to some other countries, however you must always be aware of the risks; inflation risk and currency depreciation risk and how they affect the value of your investment portfolio. When making a decision on investing in fixed income securities , make sure you carefully consider the ROI and the risks mentioned earlier for your investment portfolio.

You can invest in fixed income opportunities in Nigeria through licensed stockbrokers.

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