THOUGHT OF THE WEEK
INVESTING IN BONDS (PART 2)
Based on the issuer, there are four main categories of bonds issued to investors.
•Corporate bonds: These are bonds issued by corporate institutions to raise capital for their operations. Some corporate institutions tend to the corporate bonds market to raise capital, instead of accessing bank loans. Corporate bond market offer favorable terms and lower interest rate compared to bank loans. Some corporate bonds listed on the Ghana Fixed Income Market include Edendale Properties Plc, Bayport Savings and Loans and Produce Buying Company
•Municipal bonds are bonds issued by municipal authorities. Municipal bonds are common developed financial markets. There are plans for Metropolitans, Municipalities and District Assemblies (MMDA’s) to raise capital for development projects through the municipal bonds issuance.
•Government bonds are categories of bonds issued by a government treasury. Securities issued by treasury with less than 1-year to maturity are called “treasury bills”. Government of Ghana bonds issued with less than a year to maturity are called “treasury bills”, while bonds with maturities between a year and two years to maturity are called “notes” and government of Ghana bonds with maturity greater than two years are called “bonds”
•Statutory agency bonds are bonds issued by quasi-government organization. Ghana Cocobod issues cocoa bills to finance cocoa purchases. Energy Sector Levy Act (ESLA) issues long - term bonds to resolve energy sector debts.
Bonds come in different varieties. Zero- coupon bonds do not pay coupon payments are as such issued at discount to their face value. Investor pay less than the face value in order to hold the bond and are paid the face upon maturity. The 91-Day, 182- Day and 1-year government of Ghana treasury securities are zero coupon bonds. Convertible bonds are bonds which has the option of converting to equity at some point. Callable bonds are which gives the issuer the option to call back the bonds. The callable option ensures the issuer retires the bond when situations are right. The bond issuer may also embed a put option which enables the holder to sell the bond back to the issuer before the bond matures.
An issuer may establish a sinking fund where regular amount for the purpose of paying bond obligations. The issuer uses the sinking fund to retire the bond before maturity. Sinking fund provision gives confidence to bond holders by minimizing the risk of default.
This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED, which are subject to change.