when interest rates are low in 2020

in hive-167922 •  7 months ago 

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Though interest rate is falling, it does not reduce the coupon rates payable on bonds that are already in existence. By buying such bonds, you are buying into receiving interest income based on the coupons on the bonds, rather than current interest rate. The only issue is that you will buy such bonds at a relatively higher price because since the coupon on the bond is greater than the prevailing interest rate or yield, the bond will sell at a premium.

There is an inverse relationship between interest rate and bond prices, such that as interest rate falls, bond prices increase. Another downside to this strategy is that the issuers of the currently existing high coupon bonds may refinance the bonds by retiring them prematurely and replacing them with low coupon bonds of same maturity. Therein lies the reinvestment risk of bond investments.

You can easily find high coupon bonds in the Nigerian market if you look closely. Examples of high coupon bonds in the Nigerian bond market include the DUFIL Foods bond with coupon of 18.25% and maturing in 2025. Union Bank, Flour Mills, Wema Bank and Sterling Bank, all have bonds with coupons in the upward of 15% and maturities of 2 to 5 years from now. Owning a bond investment that pays 18.25% per annum in a market where the prevailing interest rate is about 9.5% for a 5-year tenor, is a windfall.

Get into foreign securities
Another strategy that can help with managing the falling interest rate regime is diving into foreign securities. I did a piece not too long ago comparing investments in Ghana Treasury Bills and Nigeria’s, and it was obvious that if the exchange rate between the Ghana Cedi and the Nigerian Naira does not change drastically, there could be gain in venturing into Ghana’s Treasury Bills. Do some research on other African markets like Kenya, Mauritius, or Tanzania and find out where you can fit in and make some gains. Be mindful of the transaction costs and other regulatory requirements.

Do your due diligence
The internet makes it easier now to engage in cross-border capital market transactions. Make sure you do your due diligence including understanding the various countries regulations on money laundry, capital gain taxes, trading commissions and fees and a host of others.

Be Warned that nothing in this article should be taken as an investment advise and you may not rely on it for your investment decisions as the author is not licensed to provide investment advice.

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