Why you should consider investing in Eurobond Funds?

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Last week, the IMF/World Bank annual spring meeting for 2019 was concluded. Apart from increased flexibility, the harmonization of the multiple exchange rate system and removal of FX restrictions were some of the key recommendations made for Nigeria. If the historical trend is anything to go by, we know that the CBN often hold FX rates above its fair value till unbearable pressure builds up to necessitate a devaluation. Hence, investment in a dollar-denominated instrument such as Eurobonds often makes economic sense over the medium to long term.

Currently, Nigeria is the third largest issuer of Eurobond in Africa. Large corporate issuers are also tapping into Eurobond market, with Ecobank Transnational Incorporation joining the fray last week with a $450.0mn issue at 9.75%. For retail investors, investing in a Eurobond Fund is, perhaps, the easiest way to benefit. Typically, a Eurobond Fund is a mutual fund designed to pool fund from different individuals – ordinarily unable to directly invest in a Eurobond- to benefit from
same as a competitive return on investment rather than holding dollar savings in a domiciliary account which yield little or no interest.

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Beside capital gain, additional benefits of investing in a Eurobond Fund include:

  1. Portfolio diversification into relatively stable dollar asset
  2. provides an avenue to hedge investment against currency risk and
  3. the tax advantage that mutual funds offer as returns are not subject to withholding tax.

Understanding Eurobonds

Euro bonds are bonds that are denominated in a currency other than that of the issuer.

It is a bond issued by the Federal Government of Nigeria in Nigeria but denominated in US Dollars. Those who buy it, buy in Dollars and the interest and principal repayment is conducted in US Dollars.

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As can be noted from the above example, Eurobonds are not necessarily denominated in Euros as the name implies. Actually, bonds denominated in US Dollars are better known as Eurodollar bonds, while those denominated in Japanese Yen are called Euroyen bonds, but Eurobonds have come to be generally associated with bonds denominated in currencies other than that of the issuer.

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How to Invest In Eurobonds

The process of investing in Eurobonds in Nigeria does not differ from that of an ordinary bond. Basically, FGN bonds and indeed, FGN Eurobonds can be bought at the primary market at the initial offer level or at the secondary market for an existing bond. The process entails completing the Tender for Federal Government of Nigeria Bonds’ form, submitting same through any of the authorised dealers and making the required payment when the bid is successful.

 

United Capital Research

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