University of Nigeria Research Publications

ONAH, Jonhnson Chijioke

PG/M .BA/98/45063

Title

Price Volatility Characteristics of Fixed Income Securities in Nigeria: An Empirical Study.

Facu

lty

Business Administration

Dep

artm

ent

Banking and Finance

Dat

e

September, 2001

Sign

atur

e

P R I C E V O L A T I L I T Y C H A R A C T E R I S T I C S OF

F I X E D I N C O M E S E C U R I T I E S I N N I G E R I A :

A N E M P I R I C A L S T U D Y

Q N A I I J O H N S O N C H I J I O K E

P G / M B A / 98 145063

D E P A R T M E N T QF B A N K I N G tk F I N A N C E

F A C U L T Y O F B U S I N E S S A D M I N I S T R A T I O N '

U N I V E R S I T Y OF N I G E R I A

E M U G U C A M P U S

S E P T E M B E R 2 0 0 1

O.E. A n c k e H e u d o f D ~ 7 p n r ~ n 1 ~ ~ 1 ~

Prof. F . 0 . 0 kaf'or , S u p ~ ~ r \ ~ i s o ~ +

\ j i

?'hi: p r i cc of ' b o n d s i n N i g e r i a 1'1-om 199 1 to 2 0 0 0 i s I c h 5

\ ~ o l a r i l e . I! main ta ined a c o n s t a n t price: 1c1c'l i'or ~ h c s c '

p e r i o d .

,41so the p r i ce o f i ndus t r i a l Ioa11s ~ r i r h i n t l ~ c s e p c r i r d ( 199 E

to 2000) is h igh ly vo la t i l e t haabonds a n d g o \ p c r . ~ ~ m c . r ~ r stor:L.+.

-. I h i s vo l a t i l i t y is i n c o n s o n a n t wirh r11c s t a t c of ' the cc.ononl>

a n d the pcr f ' c rmance o f the cornpanics a s ar t h i s t imc .

T h a t f rom 199 1 t o 1993 rhcri. \ v r ~ s a s l i gh t f luc tun t

p r i c e s o f go~ :e rnmen t s t o c k and ~ h c r c . al'tcr i r tnai

c o n s t a n t pricL: 1cve1 f rom 1004 10 2 0 0 0 .

H o w e v e r , i t ; .as a l s o found [ha t the fo l lo \v ing f'actol-s

a c c o u n t rn;,inly !'or the p r i cc \ ,o la r i l i ty of' Siscit i r l co~l lc

s ecu r i r i c s in S i g e r i a :

T h e matur i i j l l cng th o f t h e s tock

The e f f ec r s of'tlic l eve l of 'y ic lds

T h e gene ra l econonl ic coni1it ion

A n d po l i t i ca l f'nctors.

I t I S thurcl'ort. r e c o n l i l ~ c n c l ~ d that t hcsc f ac to r s h h o u l d b c

T A B L E OF COIVTEfi'T'S

Tir lePagc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

. . C e r l i r i c a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .... . . . 1 1

. . . Dedication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1

Acknou?ictfgrncnt . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . i L

Abs t rac t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \ . i

'Table o f Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \ i i

L i s t o f ' S a b l e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

C3IAI'TER O N E : I N - r f < o I ) l . i C : ' r l ~ 3 N

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 . 1 Dackgroui-llf o f t h e S tudy 1

1 .2 S ta t emen t o f t h e Prr)bli .~ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3

1 . 3 0bjectivi .s oftl-lc S t ~ ~ i i y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4

. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Re1cvan t R c s t a r c h Questions 5

1 .5 Scopeoi theStucly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

i . 6 Litni tat iunsof [ h i S t ~ ~ d y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b

1 . 7 Significance o f the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S

1 .8 Definition of'l'errns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I 2

C H A P T E R TWO: 1,1'1'~~!t~4'1'tJI<!.~ R E V 1 IlW

2 . 1 \.'hat is 1:isc.d I n c o n ~ c S e c ~ ~ r i t i c s ? . . . . . . . . . . . . . . . . . . . . 1.;

is

. . . . . . . . . . . . . . . . . . . . . 2.2 T y p e s o f r i x e d Income Secur i t ies 1 4

2.2.1 E o n d s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 .2 .2 DeScntures 2 9

. . . . . . . . . . . . . . . . . . . . 2 .2 .3 Prefcrence Stock .. . . . . . . ... 3 6

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 .2 .4 Placement i n Banks 31

. . . . . . . . . . . . . . . . . . 2 . 3 C h a n g e s in Equi l ibr ium Stock Prices 4 2

2 .4 Pr ice Vola t i l i ty /charac ter i s t ics ot'1;ixed Incomc

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * . . . . . Secur i t i e s .. 4 3

K e f e r e ~ l c e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8

C H A P T f i R I ' H R E E : RESEARCH M E T I I O D O L O G Y

3 . 1 In t roduct ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . 2 Research Ques t ions 50

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . 3 Resea rch Design 51

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 .4 Sources oi'Llata 5 1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 .5 Method o f D ~ t a Col lcc t ion 5 2

. . . . . . . . . . . . . . . . . 3 . 6 Val id i ty o f Data Collection instrumell t 5 2

. . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Determinat ion o f SampIc Size 52

3 . 8 P r o c e d t ~ ~ e for P r o c e s s i n g a n d analys is col lectei l I) . . 53

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References 54

S

CHAPTERFOUR: DATA PRESENTA' l ' lOU ANWANALYS!S

4.1 TheDaiIy8Tf ic iaI l i s t oSthc N i g c r i ~ n Stoek E x c h a n g e

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . and it's Interpretation 5 5

4 .2 Types of Fixed [ n c o n ~ e Securities A v a i l a b l e i n Nigeria . 5 8

4 . 3 Price VofatiEities of Fixed Tncoime Scc~~r i t i cs i n

Nigeria . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . .. . . . . . . . . 6 5

4.3.1 Rands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5

4.3 .2 1ndustriai Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7

4.3 .3 Government Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

4 . 3 . 4 Preference SLock . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 7 2

4 . 4 Factors D ~ . t e r r ~ a i ~ i n g S t c k Prices in !he Market . . . . . . . . 73

4.5 Measures to Determine llte Performance of Fixed

Income Sccuf i l i c s in Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5

4 . 6 Factors Determining Yiclds on Fixed Income S C C L I ~ ~ I ~ C S

inNigeria . . . . . - . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 78

References . - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

C I I A P T E R F I V E : S U M M A R Y OF' F I N D I N G S . . R E C O M M E N D A I ' I O N A N D C O N C L U S [ O N

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 . 1 Summary of F indings 8 1

5.2 Recommenclatisns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 8 3

5 . 3 Conclusion .... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4

Bibl iography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

LISTOF T A B L E S

Table i : Price V o l a l i l i l k s 01' bands in N i g e ~ i a rt'rom I W.1 1 -

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5

Table i i : Pricc Volati l i t ies of Indtrstriai L o a n s in N i g e r i a f r o i n

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1981 - 2 0 0 0 . 6 7

Tableii ir P r i c e V b l c z c i l i l i c s o f N i g e r i a 1 1 G o t l e r n m e ~ ~ t

. . . . . . . . . T ) ~ . v c l o p n ~ c n l Slacks from 1991 - 2000. 7 0

TabIc iv : F'rice voIa1i l i t ics oI'prtf'c.r-ttr~c:c s t r ~ c k s i n ! J ig~ '~ . i i~ l - r u ~ i )

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 1 - 2000. 72.

b o n d s ) , by f e d e r a l a ~ i d s t a r c si l~.rrnnlt .al[s ( ~ [ J + ~ ~ ~ H I I I C I I I

deveIopnicn~ s tocks or btrnds). or by I w a E got C ~ I ~ J I ~ ~ I I I ot'

m u n i c i p a l a u t h o r i ~ i e s (rnu~tir ipa! bonds).

In general . band holders l anv t ~ w u t5pcs of claims (HI t hc

i ssucrs . The f'irst is a r i g h l to i ' a ~ l ! rcpilymclat tsl'tl~c nnn~i~>:rI i ~ l u c

o f ~ h c b o n d a t m a t u r i t y . 1'hc ~ t h c r i s a rich1 to pcr iod ic i 1 i ~ c r c s 1 a t

a s p r c i f i e d r a t e ;1[1hr. p r i n c i p a i a m o u n t pa) a b l e i n ; L L ~ C ~ C I ; I ~ C L ~ ~ ~ it11

c o n d i t i o n s s ~ ~ ~ ? u ! R J c ~ ! i n bhc irrdt .nturc. . ! j o t 1 1 i r i I 2

unconditional. Inves!meof i n f ixed income securities a r d

presumed to h ~ v c very limited degrecsof r i s k . Ctmscquentt Iy. ~ h s y

a t t r a c t l o w rates ofrcttksn.

t!nfartun3tely, the pclrporled safety ~f inves~mcont i n bsnd.ri

i s , at times il1usory. The soplrisricated i n w n r o r is morc intercsicd

i n the rcai values of expected ir isonle than i n the moticy vaFrrcs ol'

such incon~e. Fixed income securit ies could, in t'ac~, e x p c ~ s c

principal R ~ P i r ~ sonw cases comprclmiscd wherc he band i ssuer i s

faced with long periods o f irrecoverable Iosses. 17tte purported

safety of' fixed income swuritics tltcrefr~rr. d e p r ~ r b s both OJI the

abi l i ty of issuers to gencrate a c l c q t ~ n t c incomc to cover 141s cfai t l~s

and on the a b i i i t y n f t h e macro-CCOIIUII\~ lo oper i l~c ' at s ~ a b f c price

fevcls.

This researzh thc"teI'orc cxarnines tlic pricc i , o t a ~ i I i ~ j

characteristics a f f i x e d income seczrritics. t t i v i l l a l s o go I ' t rrt l tcr

to X-rily the factors cesyonsihle for the high volatile nuttrre in thc: b

priccs sf f ixed income sectrriaies i l l Nigcriil and pc>ssiblc

1.2 S T A 3"EhfENT OF T H E PROBLEMS

The adminis trat ion of f'iseb irlcoune s e c u r i t i e s i n Nigeria

Capi ta l Market h a s riot been without problems. 'The c r r a ~ i c

fluctuations in the prices o f t h e f i x e d i n c o m e securities i n Niger ia

according to the securit ies dealers is O F course one ;of its rIlurrl

problem.

Others sic the fact that f i x e d incornc securi t ies creates i s

fimd charge on the f irm which musr meet thi,s periodic FaymL'nts.

This is r isky to the business Bccause i f 6hc earnings faII, the f i r m

may have d i f f i ~ u l t i e s in serving it's debts. These creating the r i s k

of forecIosure. Cnrzsequenrby thc firm has ts be certa in that:

a ) The ea rn ings ofxht f i rm are s table and no1 subject to 11-ids

gyrat ions .

b ) The firm has to consider how levered i~ is hzfurc embarking

on arnassirtg further loans .

Thirdly f ixed i n c o m e securities like dcbcnturc laarc n

definite rnaturily date a u d so the financial mangers musk r.zsahc

f u n d s ava i iah le to redeem the debenture w h e n !hey mature . A (

4

such rimes the f irm m a y bc haviag difficulties i n it's opera t ion but

t h i s i s o f no concern ~n the bcben l i l r c ho lde r s who must b e

satisf ied o r ~ h c trrustces wi l l takc m e a s u r e to cns i r rc conspliance.

I t is importan[ t o note that satlie o f the current brccd o f

securities deaI.:rs l a c k t h c i n -dep th ski11 and a n a l y t i c a l k n o w l c d ~ e

t h e h a n d l e .the ~ e c h n i c a I a n a l y s i s o r f l u c t u a ~ i n g p r i c e

c h a r a c t e r i s t i c s o r f i xed i ncome secz~rities in Niger ia and to sta le

clearly the possible f a c t o r s responsible Tor Ihna.

Aris ing f r o m the a b o v e is rhc f ea r hy [IIC secnri ly investors

to w i l l i n g l y invest in f ixed i n c o m e secur i t ies because o f ills low

r a t e o f r e t u r n ,

1.3 OBJECTIVES OF T H E S T U D Y

The objective o f the s tudy is ta examine the price i , o l a t i l i t y

characteristics o f fixcd income sccuritics in Nigeria and also 1 0

determine thc immediate f ~ ~ c l o r s ~ e s p o n s i b l c f o r the price

f luc tuat ions ch3racr~r i s t i c s ol'fixerf i n c o ~ n c securities in N i g e r i a .

- 3

The s tudy wiI1 also show the ryprs of f ixed income s e c u r i 1 3 c s

w h i c h N i g e r i a investors prefers and i n v e s t on and a I s o appraise ahe

advantages a n d disadvantages orns ing f ixed E I I C O M C s c c ~ ~ r i r i c ~ a h

an i n s t r u m e n t o r f inancing in N i g e r i a .

I t wii1 afso cxarnine f a c t o r s t h a ~ deteranines \ T I C c u u p m r a w

of f ixed incomc semriries u n Nigeria and f a c ~ o r s ro bc cc~nsic lere~!

before using f i x e d incame securitics as an insrrurnen~ o f I ' i~sance .

. The mtdy wi l l proffer soluaions cowards improvement,

perfect and eff ic ient administration of fixcd income s c c t ~ r i ~ i e s i n

Nigeria.

1 . 4 R E L E i 7 A N T R E S E A R C H Q U E S T I O ~ V S

I n clrdcr to cxnmine the price v o l a t i l i ~ y charectsr is l ic o f

f i x e d income secur i t i e s i n N i g e r i a , thc fullowitag r e l c v a n r

.questions w i l l be addres sed ;

1) W h a t a r c the i lvailablc fixcd income sect~riries i n Nisrr ia?

2 ) W h a t is r hz level o f p r i c e vol; i t i l icy o r f i sod inco~nr:

secur i t ies i n Pi Igeria'?

0

3 ) Of what impact h a s r k c p r i c c ~ o ! a t i l i t y c t r a i ac~c r i s i i c n!'

f ixed irrcomi. s c c n r i l i c . ~ o n i t ' s invescanent in Nigeria'?

4) W h a t faclors are responsible for the price I'luc~ua~ring

c h a r a c ~ c s i s ~ i c s o f fixed i n c ~ l n c scca~rit ics in Nigcria?

1.5 SCOPE 0 F THE S TlJn Y

The study w i l l cotrrzr t h e ndmisristracinn of i'ixed i ncn ln r .

s ecur i t i e s i n the Nigeria capi ta l market. 'E'ht: pricc s .u la t i l i l )

characteristics o f Tixed income securit ies in Nigcria w i l l be

e x a m i n e d a n d h i g h l i g h t e d . The roscarclicr w ~ l l also alltenlpl to

ga the r informfition abou t the factors r c u p o n s i h ~ c f'rrr ~ h c price

vola t i le n a t u r e oEf ixcb income s e c u r i ~ i w An N i g e r i a .

1.6 LII~IITATIO~VSOFTFJESTUDY

The r e x c e r c h t r Ruriuig h i s sc11dr1 L F I I ~ C ~ ~ O L : ~ 31) I H ~ I I )

c o n s t s a i n ~ s i n arriving ;it his work. IIctlcc. b c l ~ w n t m c s i i ~ n c afttw

a i n h i b i t i n g fac tors r h a r he passes ~hra~llgh In rnakc this rvork a

reaIity;

Tiar u:

The researcher f inds time ~ u a ~ ~ a g c m e n l IU be h a r d on h i s pas^,

cons ide r ing t ! ~ c nv!rnerous work i n v o l v e d , study a n d m e c ~ i n g other

t ed ious official erlgagerrlent.

Books:

Anather oppressing lh ing i n this work is inck o f t e u ~ books

that can offer better s o l u f i ~ r ~ s to [h i s researcher u ork. Thcrc. a r c

ve ry few books availt~blc. on his s u b j e c t arcn c spec ia l l? a s i l

re lates to t h e Nigeria contexts. 6:0nsequcnt)ly, the r~'st:archer h a d

t o rely on j o u r n a l s a n d extensilrc in terv iew wit!^ @ompan>. . Danks.

C h i r f ' E x e c u t i v e s a n d s c c u r i l y deaicrs for i n f i , ~ n ~ i ~ ~ i ~ ! ) s .

Firr nnce:

The researcher suslainrd money cot~straints i n the c o l f e c t i ~ n

of da ta due to 1111' x u n o m i c condi t ion nit'the country such a s h i g h

c o s t o f t r a n s p o r t a t i o n causcd b y the rccesll incrcnsc in the pr ic t5

ofpe t to lcun i p r ~ r d ~ ~ c t s .

1.7 SIGNIFfCil.hTCE OF T H E S T U D I'

I n v e s t m e n t in secur i t ies in g e n e r a l is an e s sen t i a ! a n d

i m p o r t a n t fncitor in d ~ . i x E o p i r ~ g economics l i k e N i g e r i a , T'hc f i x e d

i n c o m e s c c u r i t i c s ~ p ~ a y s a significsnl rok i n this p rocess .

T o t h i s e n J , t h e rcsrrlt o f t h e s t u d y wi l l ~ I I ~ C ' C ~ c c )n t r i bu t c to

the know!cJgc o f c o r p o r a t e financc i n general a t ~ d 1 1 ) ~ h c o p ~ ' r a t ~ r s

o f the capita1 m ~ t r k e t spec i f i ca l ly investors in lmding IB ~ I T Y C S ~ i11

f ixed i n c o ~ n c secrlrit ics.

1.8 DEF~NITIoiV0FTER~II.S

B a s i s p o i n ~ : A t e rm i n t h c f inn11r iaI ~ ~ ~ P L C L S !'or ~ n c o ~ ~ ~ ' - h u n d r c d i h

( or one percen t ) ~ ~ o n t ' p e r c c n t ; t g t . p o i n t .

Bid-ask sprend: 'The c l c m c n t in ~ h o cos t o f b u ) i n g a n d s c l l i ~ l g a t )

asset t h a t a r i ses because of t h e r o l e p l a y e d h y dca1crs o r " M a r k e t

MarrkersVin p u r c h a s e and sa1c.

Broker's rommission: The fee c h a r g c d by a n i n r c r rned i a ry in a

transaction o f b u y i n g o r s c l l i n g a s ecur i ty .

9

CallPvovisiorr: Ent i t l e s the d e b t o r to r c p a p i n a d v a n c c , u s i ~ n l l y a1

.some penalty and only f l k r a number of years i'rtznl; I ~ L . time 0 f

i ssuance.

o f t w o o r more s i m p l e r R S S ~ ~ S .

C m v e r t i h i C i t y : Provis ion of a security's contract E I ~ I c7IIows ~ h c

nwner to c o n v c r t i t into anoth t r s e c u r i ~ y o r ansthcr t y p c o f

secur i ty .

Couporl rrrfr: TEIC percentage of the principal t h a t is a b o n d ' s

con t rac tua l year ly paynltrai, which is the yearly cou,pon.

Currency: T h c t y p c of nominal n ~ o n e ~ a r y u n i t i n whictm an a s s e l i:,

d c n r s m i n a t e d a n d i t > pny ments arc. rnads.

the va lue of a n a s se t ' s expcctcd cash flow is deternsinecl, L

Divisibility: T h e p rope r ty o l ' a n asset t h a t a l t o \ \ s i t to he d i i i d ~ d

in to smnII u n i t s .

10

D r r r ~ t i o n : A measure of the percentage change in the p r i c e o f ' t h e

bond f o r a g iven change i n ahc l eve l of !he b o n d ' s d i scoun t ra re .

Exchange ra te premium: T h e por t ion of thc requ i r ed rate o f return

tha t c o m p e n s a t e s a n inventor for the pe rce ived v o l a t i l i t y of the

r a t e of exchange between the home currency a n d \he current). i n

wh ich a n a s s e t ' s cash Rows a r e dmominared.

It l f fariunprentium: The p o r t i o n d r h e required r a t e o r r e t u r n tha t

compensates t b . ~ i n v e l ~ t a r fo r expected changc i 1 1 the p u r c h a s i n g

p o w e r of !he n lonc ta ry lanits in itihich the cash flows ohan a s s e l art:

dcnorninaled.

Liquidi ty yrenliunr: The p o r t i o n nf t h e requi red r a r e ol'rcrurn [ h a 1

c o m p e n s a t e s t h e investor f o r the perceived dil'l'icul ty a n d cost (1 1'

seIIing t h e asset in fhe future.

hfarket M a k e r : Also cal led a "dealer" ( h i s is i n s t i t u r i a n o r

i n d i v i d u a l wh ich f a c i l i ~ a t e s I r a d i n g in a n a s s c t b y s tand ing rc.:id~

t o b u y o r sell a n a s s e l , ho ld ing the assel i n i n v e n t o r y , a n d m a k i n g

b a p r o f i t on t h e difference be~ween rlw f w u prices.

REFERENCES:

2 ) Okafor, F . 0 , 1983 "Tnvestmerit Decis ions" E v a l u a ~ i o n of'

Projects a n d S e ~ u r i f i e s ( Casssl P u b l i c a t i o n , p . 12 - 1 5 )

3 ) Unpubl i shed Lecture Nates on Manageria! Finance for MI3A

R a n k i n g and Finance Sludent by Modebe N.J, ( M r s ] . p . 3 - 7 .

CHAPTERTWO

LITERA TURE REVIEW'

2.1 W H A T IS F I X E D INCOME S E C U R I T I E S ?

According to Okafao [ 1983: i 5 ) "fixed income ~ c ' c u r i ~ i c s a r e

d e b t i n s t r u m e n t s (bonds) w h i c h provide L;>r s p c c i f i c r a l e s o f

money income t o halders. They a r e vcry Tii111id a n d v i r t u a l l j ' r i h k -

f ree inves tmen! because their money v a l u e s do not ~ h a r l g e n . i l h

t i m e .

Tn the w o r d s of Fabozzi, M o d i g l i a n i and Fcrri( 198 1 : 3 )

"Fixed income secur i t i e s a re deb t in s t rumen t t h a t p a y s a l'ised

dollar amount the h o l d e r .

Bonds are i ssued b y v a r i o u s types o f business o r g a n i z a t i o n s

(Corporate bonds) 5 y federal and s ta te g ~ v c r n r n c ~ ~ ~ s [ goveFnRTlCrlt

deve lopment s tocks or bonds),orhy local governtficnt ~ r r n u ~ a i c i p i l l

au thor i t i e s (Munic ipa l bonds). T I I general, bond holders have tn80

t ypes of c l a ims on the issuers. Thc firs1 is a r i g h c TO f u l l rcpayrncnt

of the n o m i n a l va lue of the bond 31 maturity. The other is a right

to per iodic in t e res t aT a spec i f i ed rDte o f the principal nmorrnt

I I

payable in accordance w i t h corrdi~ians s~ ipu la ted i n zhc bond

i n d e n t u r e , B o t h c l a i m s are uncond ic iuna l . ~ n v e s t m e n ~ s i n l' ixed

income securit ies are presumed 10 h a v e v e r y l i m i ~ e d d e p r t c s ot '

risk or are r i sk free and consequently, l h c y al tracl low rate:, of'

r e t u r n .

2.2 TYPES OF FIXED INCOME SEClrRITIES

The n a t u r e DL' rights 2nd conlrol excrcisud by a s e c u r i ~ y -

ho lde r d e p e n d s ul?ianarcly orb the type 01' security held I(Ok;tfoc

1983: 14). In h a t conncctior~, r i g h t s inhcrctst i n f i xed irloomc

securi t ies a r e d i f f e ren t from those ~ F v a r i i i b l c inco~mc secttrit its.

Therefore the types o f f ixed income scctrrit ies arc-:

- Bonds

- Debentures

- Preferred stock

- Placemen t i n B a n k s ( t h i s comprises oi' ctcposits in b a n k

savings account and f ixed depasits a c c o u n t s .

2.2.1 Rot7 6s

Bonds c a n be v a r i o u s l y described a s a long term deht

i n s t r u m e n t , a prarnissoq- nole or sn I .O.U. given by a l'irnl ro

inves tors , E m e k e k ~ v u e ( I 896: 1 15) .

A bond therefore is a long term dcbr instrumen1 with w h i c h

firms raises f~rnds for rhc i r various e x p a n s i o n p r c ~ g r a m n ~ c . T h i s

d e b t i n s t r u m e n t is a c c s m p a n i c d ky a piece ( ~ r document c a l l e d

inden tu re w h i c h st ipulates t h c b recms c r f t h e con r rac l b e c n r m t h e

part ies. Because of the complex nature or thc c o n t r a c ~ u a l

ob l iga t ion , a bond may not be a b k l o c o n t a i n all rl~c s ~ i p u l a ~ c c l

prov i s ions and so this indenture gives de t a i l ed nccoun r ul' !he

var ious obl igat ions contained in !Re conlracl.

Generally, b o n d s conta in t w o p r o m i s e s . There are, promisc

of periodic interest payments as t h e y fa11 due a n d the redemption

of the bond a t t h e scipulatcd dates . Thcss r w c ~ promists art :

u n c o n d i t i o n a l a n d so the p a y m e n t s t i p u l a ~ i o n s must be adhered to

o r t h e f i r m wi l l be declared i ~ ~ . ~ ~ I v e n t . E3orlds ean be derlominaicd

b

to a n y amoun l , I the g e n e r a l p r a c t i c e is to h a v e h o w

denomina t ions for the bond .

I 0

In the opinion O F Ernekekwive. h o w d e o o u ~ i n a a i o n 01' ~ L I I I L I S

e n h a n c e s the market potential of the bond as divcrsc i n ~ ; e s t u r s c a n

afford t r , hold the band. Hotvcvr:r, chis v i e w can be o v e r h e l d .

Since a b ~ n d is a promissory ccrnlract w h i c h c a n n o t conlain

n i l t he deaails i n v o l v e d , a supplementary contract c a l l c d bond

i n d e n t u r e is issued, to conta in a l l rhu other rc lcvant mater ia l s to

? h e contract .

Some of the specif icatians rhac w i l l be f o u n d in a rypic i~ l

b a n d i n d e n t u r e a s stated by Emekekwue(1996: I 15) arc :

The t e rms o f bond issue

Desc r ip t ion of the pmperiy p ledged

I n t e r e s t r a t e s

CalI price

Maturilydatc

SpeciFieatirrn of p r i n c i p a l a m o u n t

Conversion features

Protect ive clauses such ;IS ! i r n i t ~ o n indebrcdncss , s i n k i n g

f u n d p rov i s ion and d i v i d c n d r e s t r k ~ i o n s err:.

F e a t t a r e s o f B o n d s

Ernekekwue (1946: I 16) olbitrveci ihar t h e ma jo r t 'eaturc' 111ill

d i f f e r e n t i a t e b o n d s From cornrnm~ stock i n c l i ~ c l c 11ic I ' o l I o \ \ i l l y :

a . Mntzrr i ty: Bond h a v e gal a def in i~c: marurity date l i ~ i l i k r

equity stocl. :~ rhnt do not h a i ~ c r n a t u r i r y d a t e s . As a rcsu11 0 1 '

this m a t u r i t y d a l e m a n a g c ~ n c n i is; crsmpcllcd 1 0 H I . I I , C

r c p a y m c n t ~ v k c t ~ nhe hor~ct i c rcl Re rcdc .en~r ( l . OIIC 151' alw

unfc lvourab le nspecas o f dcb l from the issuers p o i ~ ~ t o t ' v i c t ~

is the i n h e r c n t r i sk [ha t i~ may carlie duc a t a t inhe U I I C I , i r

w i l l be v e r y dif f icdt to repay. This diUici111t posirion \ \ .hict i

t hc f i r m m a y f ind i tsclf nu! w i ~ h s t a n d i n g , i l has to redcrrn

[he bond on the stipulated dcr~e, f a i l u r c 10 do (h i s might

result i n fr~reclosures of t h e campany.

b . Sinking F I I I T ~ : A f i r m might takc oul a sinking fund polic!

w i t h i l s lriistcc 10 e n a b l e B I rcdlccm its bonds 011 ~ua la l r ic> . .

This sinking fund is d r e n v i e w e d a s cash drain by r l lc l'ir11-r

wl-ro must be making t h i s periodic paynlcllts, I la t \ evcr . c111

the par! C I ' L ~ U bond hnlderl;. ir is v i c u . e d I 'a t . c l r~~- i~b l> . br.cItusc

2 0

Also they can Rave specif ic c la ims i f a part icular assc l i k

p[edged. If assets like real estare is p l c d g c d i~ is cal led a

morfgage bond, i f equiprnents Iikc machines , c a r s , e t c arc'

pledged, t h e y are cal led equipment trust b o n d . A f i r m

holding thc s t c u r i ~ y d l h e other firms can pledge t h i s t o the

bond holdcrs, this w i l l bc ca l l ed c o l l a ~ e r a t trust bonds .

S imi lar ly a parent company can guaranlce the b o n d s of' its

subs id iar ies to the bond holders , such bonds arc. then c a l l e d

guaranteed bonds,

f . Call; This provisian i f conrained in the indenture gives t h e

f i rm the r i g h t to call in its bonds Sor redemption, A l'irtin

r a the r t h a n be forced to redeem its b o n d at a rime rhal migh t

be u n f a v o u r a b l e to i t , migh t cJect to ca l l in tht b o n d

immedia te ly . This provision helps f inanc ia l managers; to

restructure t h e i r f i n a n c i a l plans, as they w i l l bc a b l e rr, r c ~ i r c

a p a r t i c u l a r tjape a f band and replace i r wit11 another. I hc

provis ion gsneraljy s t a t c s that a Sirin must p a y an amount

greater than thc par value of t h e bond, Odif'e ( 1 9 8 4 : 271.

This addi t ionaI s u m is de f ined as the tali premium.

Odifc believed t ha t t h i s fea ture rhough benei'icia! tu

the firm i s detr imental 10 the bond holder, When inlr-rest

rates s tar ts to drop the market va lue of band will l i k e to scI1

t h e bonds i n order fo make a profit margin bctween rfhc

selling pr ice and the par value. Similarly when interest rittcs

s t a r t s to r i se the market va lue o f thc bond m i l l d r o p and

bondhoIdcrs wi!l f ind i t unprofitable to se l l them. A t this

time however , the f i rms might want In buy u p such bonds and

r ep lace them w i t h hers ahat have lolagermaturi ty da les .

g. Adnnagernen~ConrroI: Bond holders d o no? have control over

the management because they don ' t have vot ing r ights .

S ince t h e y don't h a v e vot ing r ights the ownersh ip s ~ r u c 1 u r c

o f t h e f i rm cannot b c tampered with, as a result o l ' i s sue o f

bonds .

This will Be t h e c a s t so long as the bond indenture d o

no t h a v e convers ion c lause . EIowever, Odi fc bel ieved thal

e v e n t h o u g h t h e y d o n ' t h a v e d i r ec t c o n t r o l on [ h e

3 3 - -

m a n a g e m e n t , they exercise i n d i r e c ~ c o n t r o l on t h e m . I f 111e

bond indenture c o n t a i n r e s t r i c t i ons on d i v i d e n d pa>,mc.tlIs.

minimum c u r r e n t and g c a r i n g r a t i o s a n d af'ter acquirc.3

p r o p e r t y c l a u s e , [he h a n d s of the management wi l l bc [led.

To tha t extent w h i c h the managemeria are impaired b y tht 'sc

c lauses , t hey e x e r c i s e coi i t rol on t h c management.

T y p o l o g y o f B o n d s

For the purpose o frh i s study, wc s h a l l broadly d i s t i n g u i s l ~

between two types of b o n d s , s e c u r e d b o n d s a n d u n s e c u r e d b o n d s .

A11 the b o n d s t h a t a re issued by a firtin are i n a s e n s c secl~red Ry t h u

credit wor th iness o f t h e f i rm . Bz~r where b o n d s a re i n a d c l i ~ i o n ro

t h i s , secured by the p ledge o f a n y specific auvvt, w c regilrd the111 a s

secured bonds. U n s e c u r e d b o n d s a r e no t s e c u r c d b y a n y p l e d g e 01'

a s s e t s . This t y p e of b o n d s w e r e f c r to a s d e b e n t u r c s , E1-11ckek1vue

( I 996: 1 19).

The difference b e ~ w e e n a s ecu rcd bond a n d a n u n - s e c u r c d

bond b e c o m e s o b v i o u s in rhc e v e n t o f l i q u i d a t i o n . A t s u c h t i lucs .

3 3

the secured bond h o l d e r s w i l l f o rec lose the p a r t i c u l a r a s s e t

pledged by the f i rm . T h i s asset w i i t be soId a n d the proceeds u s e d

I n [ h e e v e n t o f the value of' t o pay of f the secured bond h o l d e r s .

t he pledged asse t not being st1 f l ' ic icn

this t ime t h e y wil l rank s ide by side 10 other c r c d f r o r s of ihe I'irm

In the words a f Emekew~ic, the safety o f t h e b o n d koldcrs;

does not depend on w h a t asset t ha l is pledged. P u ~ c - n r i a l bond

holders don ' t invest: on the b o n d s because they w a n 1 TO fureclos l - .

on the asset o f the c o m p a n y . T h e y insis1 o~ sumc v a / u a b l c asset

being pledged as a way ofensuring guad crcdit hehuvitrur on the

f i rm issuing t he 3 s s e t . There is a n Ibo s a y i n g tila!, "rhc ati irudc: of'

a person w h e n he is asking l'or a toan is no1 n-rain~ainccl when i r is

t i m e to r e p a y the loan". This type s f bchavlst~r is also pc rpe t r a l c d

by business f i rms . There fore Some t h ing 0fvaTi1e ta the b o r r o w e r

b m u s t be tied up, i n h i s e f f o r t to s a v e o r r e r r i eve i t , h e w i l l

cons t an t ly r e m i l d h i m s e r f to pay h i s d c b t .

2 4

The ultimaie safety o f the bondholders dcpend an lac abi i i ty

o f the f i rm to generate pos i t ive ca sh fIows w i t h w h i c h i~ car1

service the deb6 and l iquidate thcm when t h e nccd arises, 2 n d I ~ C

real izable v a l u e of [he asser i n the event of Iiquidatiorms. A t'irrn

can p ledge one of i t s mach ine ry to the bond -holders . ~biachincrics

h a v e de f in i t e l i fe spa% after w h i c h they become obsolete. '1'hils ;I

f i rm pledging a plant that h a v e Five y e a r Tife span f u r n bond alma~

have 10 year l i fe span , knows t h a r after f ive years, [he: ege~iptnt:nt

t rust bond holders have no varIuable pledge or1 t h e i r b o n d s a n d so

r ank s ide by side with ather creditors d r h e f i r m .

Types of Secur i t i e s Pledged

Various types of assets a r e plcdgeci a s s c c u r i t i c s f'os bond..,.

T h e type o f a s s e l pIcdged is o f t e n uscd as t h e d o s i g n a r i o n o l ' t h c

b o n d .

1 . A4ortgrrge Bonds: T h i s type o i ' b o n d is s e c u r e d b y rca1 c s t ~ l c

6 (bonds and bu i ld ing) . I n o r d c r ro " s w c e t c n " the b o n d i s s u c ,

the f i rm might dec ide to p l edge its p r e m i s c s o r o t h c r esLalcs

2 5

at its disposal to the bondholders. 'This has he e f t ' c c l ol'

making the bondholders h a v e a sensc o f s e c u r i r y for rhrir .

funds .

2 . E y t t i y n l e n ~ T ~ M S I Bond: Somc f ' ir~ns m.ighi equaliy ~ S C I J - C 10

p k d g e some of the i r equ ip tncn t such as machinery , cars C ~ C

to thc bond hdders . Debts guaranteed by iris t y p e o Tasscfs

a r e c a l l e d e q u i p m e n t t r u s t b o n d s . B o n d h o l d s r s a r c

r cminded to exercise cau t ion i n a c c c p l i n g [ h i s t y p c of'

guarantees, because uIlim;itcly they [nay f i n d !ha[ L I I C I P

guarantee is worthlesr after !he plan t h a v e w o r k c d o u ~ i t s

useful Iife.

3 . C o I l n ~ e r ~ ~ l Trusr Botzds: S o m e f i rms might ho ld rhe comnio~ i

s tock o r even bands ofothercurnpanit.s , i n s ~ e a d ofdispusing

these i n s t r u m e n t s and u s i n g i ts proceeds, migh! dtcidc. to

p ledge them as t o l l a t e r a 1 for l oan .

4 . Gunranreed Bonds. I n this [ype o f b o n d s , no a s s c r s a r c

p ledged. The f ac t t ha t a s s e t s a r e n o t p l e d g e d d o e s no t m a k c

t h e m more risky b e c a u s c a s w e h a v e p o i n t c d o u t rhe s a f e t y 01'

2 6

bandhalders does not depend on a s s e t s pledged.

Mere, a parent camparay can guarantee he bonds of its

subs id ia r i e s as n w a y ~ E c n h a n c i n g its m a r k e t a b i l i t y .

Factors to be Considered before using Bonds a s a n I n s t r u m e n t

of F inancc

One of the features o S I b o r ~ d is thar; i t c r ea t e s a f'ixed charge

on the f i rm. I:aiiure to pay ahis charge could c a u s c c-r~~barrassmcnl

to the f i rm. Thus the firm has to bc certain rh r t~ :

I . T h e earnings of he f i r m a r e s~ablt : a n d not subjcct to w i d c

gyration'? I'f the earnings are not s t a b l e o r 1'1rrc1rra1cs rapid!>/

the f i rm wi!I be exposing i t se l f to r h e risk o f t 'oreclosurc b y

the trustees ofthe bondlmolders.

7 , Capital S!rucrrrrc: The f i r has to cons idc r how l e v e r e d i r is

before e m b a r k i n g o n a m a s s i n g fur ther loans . I f i r is h i g h l ~

levered say the deb t jequ i t y or d e b t / c a p i ~ a l i z a ~ i o n rar ios art.

h very h i g h t h e firm has to be caut ious i n i ssuing f u r t h e r d e b t

i n s t r u m e n t s . Apar t f rom e x p o s i n g i t sc l f ro v e r y h i g h r i s k .

2 7

po ten t i a l investors w i l l not look Tavo~rab!y a! firms [ h a t i i r ~

h i g h l y levered. This wil l place the t ' i r n ~ i n difl'iclt11tic.s

whenever i t wants to raise more c a p i d a I in ~ U I I I S C .

3 . R e s f r i c t i v e r !auses i n the bond j n i k r l ~ u r e : I I ' the bond

i n d e n t u r e 6 0 1 : t ~ i n s a 101 of re$tric!ive C ~ ~ U S ~ S a s regards ehc

issue of fu iuredcbr instrumentsar paynncnt ~ I ' d i v i c l c n d , f h c n

t h e h a n d s uf m a n a g e m e n t wil l bc tied.

4 . P r ~ p o r t i o n O f f i x e d a s s e f to Psfa lasse t ; I f thc r a l i o u r

propor t ion of fixed asset is low i n p r o p o r t i o n to to la1 a s s c l .

t he f i rm wi l l have difficulty i n issuing bands because 1 h e r c

wiI1 be no asset to piedge for the l o a n s .

5 . Inelustic rlernnnd: T h e d e m a n d for the prodtlcts of t h e l'irm

w i s h i n g to issue bonds should be ine last ic . I f t h e demand I'crr

to crraric f l u c t u a t i o n i n

t o se rv ice t h e f i scd

the p roduc t is efastic i t w i l l give rise

earnings t h u s r e d u c i n g its a b i l i t y

charges .

I 6. A corpora t ion that h a s r e a c h e d i t s o p t i m u m p o i n t i n

c ap i t a l i za~ ion n e e d n o t issue a d d i t i o n a l d e b t i n s t r u m e n t s

2 8

because this may prove i n i m i c a l to t h e e a r n i n g s uT the I'irm

resul t ing in over c a p i ~ a F i z a ~ i o n .

7. Rnficipnriuur off~rrztre price i n c r ~ a s ~ s : 11- prices of r h ~

p r o d u c t s are expec ted to rise En future , flaen a f i r m can raise

f u n d s by debt inslrlament In order ID takc advantage 01'1hc

price increases .

8 . Covpmade conrro/: Since t h e s a l e a f ai fdi l ional carnmon

stock w i l l erode the degrec at'corpurare control currcntl,s

Factors that Determine the C o u p o n Rate on B o n d s

I n the w o r d s o f Nwatlkwo (1988: 1 3 4 1 , he obscrvcd ~ E : a t

several factors he lp toldetesminc the coupon rate t h a t [ h e fir131 wil l

offer for its bonds . Someof thcsc are:

1 . Credil stunding of r k firm?: The c r c d i ~ s tanding and

reputarion of the firm p lays an important role i n c f e ~ t ' r m i n i t ~ g

the interest rate on t h e bond . If i f is a f i r m w i t h g o o d c r c d i ~

s t and ing , low leverage and g m d rcpa~tation i n t e r m s o t '

29

products, then the interest rate on its bond is l ikely to be

low. On thc other hnnd i f the f irm is new, no good crerl i~

record or high leverage, i t has to pay h igh inrerest t'ur

investors to be in teres ted in its bonds.

2. State ofthe m a r k e t : I F h e m a r k e t for f u ~ ~ d , that is the capira l

market is tight, the firm w i l l s ~ ~ r e l y have difEiculrlic.3 in

marketing its securities. C o n s e q u e n t l y , i t wi l l offer l a r g e

intcrest in order to gel market for its bonds.

3. Rate ofi:7reres~paid on high grade bovrds , t-I igh g r a d e b o n d s

a r e b o n d s i s s ~ e d by w r y repurable cornp;.lnits o r c v z n thc

government. I f the inccresl p a i d on high gradle bonds are

Iow, then the inlerest l o bc paid by the firm has to bl: high

then that for thc high gradc bonds, that is to say t h a l or tacr

f i rms wi l t take (heir bearing fsam rllc ra lc paid on h igh grabc

bonds .

h

2,2.2 D ~ b e r l t u r e s

In the words o f E m e k e k w w (I996 ; I 2 6 ) c lcbsnturcs a r e

3 0

general ly r e f e r r ed to iis unsecurecl bonds . T h e y arc. no1 s e c ~ ~ r c d u n

a n y asset of the f i rm , b e c a ~ r s e t h y are not seclrrzd on a n y asse l ,

deben ture h o l d e r s h a v e no lien on a n y p a r t i c u l a r asscr ol'thr fir111

I n the even t of d e f a u l t debenture liofders carinol l a y c l a i m O H an). ..

asset of the f i rm a s a r e su l t they canno t foreciosc. fIowcvc.r, in ahc

event o f defaul t o f p a y i n g rhe periodic fixed charges or r c d w n ~ i ~ m g

t h e debenture o r both they can seek rcrnisdics in a l aw c o w for

w h i c h a receiver w i l i be appointed.

Emekekwue believed tha t since deben tu re are unscuurcd

bonds , t h e h o l d e r s have no l i e n on any asset hence the ho ld ing of'

debentures is considered to be very r i s k y . T h i s h igh r i s k is

however compensated b y h i g h returns which dcben lu rc holders arc

promised. I t is p e r t i n e n t 10 mention that , because d e b e n t u r e s are

not secured on n n y asset docs not lnean that t h e y are more r isky

than bonds. The secu r i ty of bond o r debcn tu rc holders shou ld no^

be assessed by t h e magni tude of the a s s e t that i s p l e d g e d . 'i 'hc

a u l t ima te safe ty of deben tu re holder:; shou ld be based on the

f inanc ia l s t rength o f the company znd ils abi l i ty lo o p c r ~ l l c

3 1

p ro f i t ab ly as a g o i n g concern . T h u s the deben tu re o f a f inancia l ly

s t r o n g f i rm might p rove to be a be t ter inves tment than the

m o r t g a g e bond of a f inancia l weak f i rm.

Deben tu res can have a subord ina t ion c lause a t t ached to i t . 5

When t h i s happens it becomes a subord ina ted d e b e n t u r e . The

c l a i m s o f a s u b o r d i n a t e d . d e b e n t u r e a re i n f e r i o r t o that o f a

d e b e n t u r e h o l d e r . D u e to h i s s u b o r d i n a t i o n c l a u s e s , s u c h

d e b e n t u r e s a re cons ide red more r isky than ordinary deben tu re . T o

c o m p e n s a t e fo r this , it is usual t o p romise a h igher re turn on such

deben tu res . Mor tgage bondho lders rank f i rs t in sa fe ty .

T h i s i s fo l lowed by deben tu re holders which rank pa r ipasue

w i t h t h e g e n e r a l c r e d i t o r s , t h e n s u b o r d i n a t e d d e b e n t u r e .

S u b o r d i n a t e d deben tu res have super io r c la ims to the asse ts o f t h e

f i rm when compared t o prefer red s tocks and equi ty s t o c k . Firms

p r e f e r to i ssue subord ina ted deben tu re to prefer red s tock becausc

t h e in te res t payment on deben tu res are tax deduc t ib le expense

u n l i k e t h e prefer red s tocks . Subord ina ted deben tu res o f t e n carry

convers ion r ights which can be exerc ised by the ho lde r s .

A d v a n t a g e s of u s i n g D e b e n t u r e s for F i n a n c i n g

T h e r e a r c severa l advan tages i n us ing dcbenturos a s

ins t rument fo r Financing as s ta ted by Emckekwue ( 1 978 : 1 2 7 ) .

T h e s e a r e :

not have v o t i n g r ights and hence exerc i se no in f luence i n rllc

v o t i n g for d i rec to r s . F i rms may wish to ra ise add i t iona l

funds for i ts opera t ions wi thout being wi l l ing to g ive up a

port-ion o f its con t ro l i n that case thc usc o f debt i n s t r u m e ~ l t s

becomes the best a l t e rna t ive .

2 . C o s f benefit of using debentzrres: T h e r e are va r ious cost

benef i t s that will be der ived from the use o f debentures as

ins t rument o f f inance . These inc lude :

a . T h c payment o f intcrcst on debentures a r c ol 'tcr~

cons idered as a tax deduc t ib le e s p c n s c . Def'orc ~ h c

corpora te p ro f i t s a re taxed, thc a m o u n t paid ou l as

in teres t is deduc ted , this sav ings irrcreaszs t h u c a h h

f lows ava i l ab le to the o rgan iza t ion .

b. ?'he cost o f issuing debentures such as i n v z s t i g a l i ~ l n

a n d underwrit ing debenrures a r e much Iess t h a n r h a t

debentures are much l c s s rhan the amount p a i d ou t a s -

d i v i d e n d s . Thus i f t h e r e are two firms, one Ic.verr:ct and

the other not levered, the a m o u n t o f p a y m e n t s that w i l l

b e made by lhe [cvcred firm i n thc

be m u c h less r i m what w i l l he pa

the unlevcred firm.

3 . Flexibility affinll-rncicrr' srrr icturr: 'Ihc use ul' dcbrn!urcs

ensures f l ex ib i l i t y in the f i n a n c i ~ i l s r r u c t u r c . L1ebe1reurc.s

h a v e a m a t u r i t y date and so c a n be redeemed at matur i ty , t h i s

is u n I i k e the case in equity stock thnl do not havc ~na~trriry

date. I f a levered firm were ts b t over-capi ta l ized, i t can

rectify this when he debentures m a t u r e by redceming t he

d e b e n t u r e s thus scducing the amount of l'unds ;fkillt is

b p l o u g h e d in to the v e n t u r e . 1'1111s ahe a v a i l i t b i l i r y of'

deben tu res enables a firm to i n c r e a s c us decrcasc i t s c a p i t a l

"3 -1

s t r u c t u r e w i t h o u t m u c h d i f f i c u I t i e s . I f ' t h e p r i c e o f z c l i l i ~ ~

s t o c k is d e p r e s s e d i n t h e m a r k e t , t h t n t h c f i rm c a n i ssuc

debmaures irnriI ~h ings imprsvc. Also e v e n i f i n t e r e s t r u l t s

are high, a firm can issue J e b e n t u r c s w i t h a c a l l p r o v i s i o n .

sa t h a t i t can r e d e e m these when the intercst rate i m p r o v e .

4. Considert-rr!an of exy~bienc-!I: This could arise from r h c

iemps of the market, i f the economy is i n the s t a t e ol'

recess ion thc sale of common stock might p r o v e v c r y

d i f f i c u l t arid in that case, the firm wishing to r a i s c more

funds wi l l have to use debentures . This is bscaiisc the

investors w i l l wan1 a rcasonablc. m n r g i n of safe ty for thc

funds and a guaranteed S O U ~ C C a f i n ~ ~ t n c .

5 . A J l e r n n t i v ~ 10 shori / r r w deb: 11' thc firm t lns incurred i . t .r ) .

many short t e rm deb t s that are very cost ly , tire f ir111 c a n

replace a l i these debts by t h e issue o l ' a sing'le debcrlture.

T h i s single dcbcnture rhal replaces one short term debts is

caIled f u n d e d debt .

: 5

D i s a d v a n t ~ g e s o f u s i n g D e b c n t u r c s a s a n Instrzr m e n t o r Finance

1. I t cr.ea1e.s fisedcharge: The use ofdebentures create a 1-ixed

charge o n the f i r m who must meet t h i s periodic p a y n l e n l s .

This is risky t o the business, i f the earnings fa l l , IIrm

may have difficulaies in servicing its debts. Thus creating

the r i s k o f foreclosure, I n common sfock f i n a n c i n g the

payment of d i v i d e n d coi~ld be m i t r e d during such ad\-crsc

condit ions.

2 . The d e b e n t u r e indenture rnigh! i n c l u d e a lo1 of res~r ic r iue

provis ions that might unnecessar i iy tie ~ h c l ands of

m a n a g e m e n t , Some of lhese restriclions could b e rhc:

m a i n t e n a n c e or d c f i n i t c l e v c r a g e ra t io s , c l i v i d e n d

restr ict ion, etc.

3 . Maturity dale; Oebentures h a v e a definiae ~naauri ty da te and

so the f inancia l managers Innst m a k e I'EIII~S avail i iblc. I ( *

redeem the deberrlures w h e n !hey naature. ha such 1ln1c.s t l i t

f i rm m a y be having diff icult ies i n its opcrarion b~11 h i s is 4) f

no conce rn to t h e d1;1bcnture holders u ho ttiust b e s a t i s f i e d o r

the t rus tees w i l l t a k e measurc to ensure c c m p I i a n c e .

3 6

4 . E x f s n $ o ~ f ~ . e v e r a g e : There is an exdent t o w h i c h Icvcred l'irms

c o u l d g o i~ ob ta in ing additional runds. I f the I'irrn is not

l evered then potential creditors w i l l h a v e no i I Ius ions abou t

inves t ing i n such f i rms . But i f t he f i rm is h igh ly Ic.\:t.rtd,

i nves to r s a r e g c n s r a l l y averse l o giving t h e i r l 'unds a s I o n n s

to such f i r m s .

2.2.3 Preference Shures (PreJfrredSlacX j

These are gene ra l ly rc fer rcd ro a s h y b r i d srcuri l iru. T h e ) ar t .

h y b r i d because such securities h a v e some I'eaturcs of1'ixc.d i~-tcomc

s e c u r i t i e s and s o m e cha rac te r i s t i c s o f v a r i a b l e i r i comc s e c ~ ~ r i r i ~ ~

Okafor ( 1 983 : 16). Zm h i s words , wtrile rhe c s p e c t e d i n c o m c ot 'a

h y b r i d security 5s bas ica l ly a fixed perclznEagc rjf'[Iie va lue o t ' ~ h c

secur i ty , t he payment sf such income is c o r ~ t i n g c n t on the profir

performance of the i s sue r .

In the v iews o f Okafo r . prel'erred s t o c k s a r c u n p o o ~ l ~ ~ r

media fo r f inancia l a s se t ir lvestment, p a r t i c i ~ l a r l y i 1 1 d c v t : I o p i ~ ~ ~

e c o n o m i c s . The r cason is tha t t h e y rleither 0fl'c.r t h e c h a n c e of'

_; 7

l a r g e profi ts l ike e q u i t y s tock n o r the guarantee o f ' s t c a d y Inone)

i n c o m e w h i c h could compensa te Tor that s h o r t c o ~ n i n g .

Basic Features of ? r e T e r e n c e S h a r e s .

Emekckwue ( 1 9 9 6 : 128) enumcrnterl f e a t ~ ~ r e s o f p r e f ' e r e ~ l c : ~

shares a s fo11ows:

1 . Preference ns regards i ncome: H o l d e r s o f preference s h a r e s

o b v i o u s l y have c l a i m s to i n c o m r in fe r io r to those 0 1 '

b o n d h o l d e r s but have a c l a i m supcszisr to thaf of cclriity

hoIders. T h a t is to say t h a t equi ty holders may nnt b c paEd

t he i r dividend e x c e p t t h e claims o f the preference stock

ho lde r s have been satisfied.

This prcferencc to income c ~ u l d be on a curniiIative o r

a non cumulat i t ,~e basis. I f i t is a cumula t ive prel 'crencc

share t he non-payment of Eritertss~ in a p a r t i c u l a r year docs

not erode the i r r ight 10 d i v i d c n d for [hat g e a r . This rig111 is

carried forward to other years w h e n t he f i rm m u s t h a w mat ie

reasonable earnings. Those e a r n i n g s which h a v e been

3 8

car r ied T~rbvard as unpaid must bc sett led rirsr before t h e

equity h o l d e r s are paid their d i v i d e d . ' T h i s p r o v i s i o n i s

often i n c l u d e d in the issue o f preli'crence sharc TO " s n C C L C I I ' '

the issue and 10 guard against u~mscrupi~ lous manageinsrlt

exp lo i t ing t h e interest of prererentc stock l a d d c r s .

Management m a y decide nut to pay div idends for a n u r ~ ~ b c r

ofyears s v i ~ h i n which t ime t h e y b u i l d up reserves, a f t e r ~ h r t r '

or four years,tRey may decide to d c c I a s e ~ ; : ~ l u r ~ n o u s dividends

to the stockhoIders. Withaul !he ~IICIUS~QII ~ P t h c c i ~ r n u l ~ l t i v t .

clause, thc preference sharehnldcr W Q I I I ~ o n l y b c e n t i t l t d I O

a f ixed pcrcent on the p:lr v a l u e of 111cir prsftlrence I i o I c l i ~ ~ g

i r r e s p e c t i v e of fthe enormity o f f h c dividctlds declared.

2 . Part ic ipat ing righrs: The prefcrlcncc share mighl h a \ c a

partic ipat ing r i g h ~ at iacl lcd 10 i t , i l l which tax i t ' t h c

d i v i d e n d for the year cxceeds a s t i p u l a t e d l e v e l , r lrc

preference share holders are entitled lo e x I r a inssrnc in

add i t ion to their fixed income.

j 0

3 . P r e f i r e n c e a s u ~ g a r d s N S S ~ I S : This r ighi i5 nut ~ I I ~ C I I T ~ ~ ~ I ~ C ~ I P I

?. a c o n t i n g c n ~ ~ y p e o f ' r i g h t , I heir r i g h t coa cla im on lhc. a s s a

c a n on ly bc exercise i n the event oI.!iquidation. ln thC VVCI I I

of w i n d i n g LIP, preference sha res r ank before o r d i n a r y s h a r e

holders. I n t h e eueni o h Iiqnidatirarr, [ h e r ight of prcl'crc-ncc

stock holders ao c la im 00 assets is s ~ ~ b a r d i r i a ~ c c l tu ~lsosrr ( 1 4 '

the general creditors.

4 . P r e f e r e n c e t o c o ~ ~ v e r s i o r ~ : I n certain C L ~ S C S : p r c f e r c ~ ~ c c 511are

ho lde r s a r c allowed the r ight to c o n i l c r t [he i r s ~ a c k I ~ o l r i i i ~ g s

to common s tock. This aga in makes !he i s s u e a t t racr i i l t . l o

the investor.

5 . Preference f a redertrption: I f !he i s sue h a s a c a l l p r o v i s i ~ r ~ .

the f i rm c a n caII i n ahe preference s h a r e for r c d e n ~ p t i o n i~ i s

u s u a l to redeem ihc prererencc share n t a va lue above par.

6. Vot ing righrs: Preference shares do not h a v e voting r i g h l ~ a$

a r u l e b u t where [he interest payrnepts have IIO[ Soen wade

fo r a number ofyears , rhcy may b e allawcd ru partictpare i n

the eIecti011 o f a few o f the directors.

4U

Maturity; Prcfereoce shares do not u s u a l l y h a v c r n a r ~ ~ r i l y

date but [here m i g h t be a provision fha l ~ r . i l F make i t

n r a n d a ~ o r y for rhe f i m $ 0 b u i l d up sinking I'u~nrl with which

lo retire paymen1 nn p r e f e r e n c e shares. Since interc.;~

p a y m e n t an p r e f e r e n c e s h a r e s a r e n o t t a x d e d u c i b l e a f i r m

m i g h t decide to retire the preference share and issue bonds

in i ts o p lace i n o r d e r to enjoy the tax bencf i t . To d o tflis

however , the Sirm h a s to m a k e the bond i s s u e a t t racr ive

A d v a n t a g e s of Finsncingwiih Preference-Shnres

i . The firm i s not obliged to ~nnkc the p e r i o d i c IpnymenIs a s i n

t h e case of b o n d s . Tha t is to say rhat he in teres t payment

does n o t c rea te f ixed c h a r g e on rhe fi1-m. I f t h e firm does n o t

make adequate earnings in a pparti~ulilr y e a r , i t i s riol

m a n d a t o r y f o r i t to pay inacrest on ah0 pwfcrcnce shares .

i i . The use of b o n d s exposes t h e f i rm tu the r isk o l ' p l d g i n g i l s

assets ns mortgage, b u t the issue a f p r c T e m 1 t e s k l a r c ~ t l v i ~ i d s

such p rob lems .

4 1

i i i . I n c o n t r a s t to e q u i t y s t o c k tvherc h o l d e r s h a r v vot ing r i g h l s ,

p r e f e r e n c e s t o c k h o l d e r s d o not have vol ing righls.

i l l . T h e earnings on pre fe r r ed stock are aclativcly jess t h a n t h a ~

for equity holders. So f i r m s could rcduce rhc a m o u n t o l 'pay

outs i n form ofdividend b y issuingprcTcrcnco stock.

v . I n t h c elscnt of l i q u i d a t i o n , they h a v e p r i o r c l a i m to a s s c t s

than equiay stock h o l d c r s .

D i s a d v s n t a g c s of Fiusncing w i t h P r e f e r e n c e S h a r e s

i . P r e f e r r e d stock psiyuuts as i n t e r e s t s art. nat t a x d e d u c t i b l e .

t h i s c a n l r a s t wi th bonds w l ~ e r c such p a y m e n t s a r c t ~ ~ x

d e d u c t i b l e expense .

i i . They a r e more expens ive t h a n b o n d s i n t e rms of' i ssue c n s r .

2.2.4 P l a c ~ m ~ ~ r ' i n B a ~ k s

A c c o r d i n g to Nwankwo ( 199 1 : 2 7 ) , " p l a c e m e n t s i n b a n k s

which f a l l under rhe c a t c g s r i e i ~ o f t ' i ~ e d i n w i n e s e c u r i ~ i c s ;.ire time

a n d savings deposits".

4 2

I n h i s w o r d s , s a v i n g s and t ime d e p o s i t e s a r e i n ~ e r e s t bilari11g

a n d s u b j e c t ru min imum matu r i t y o r no t i ce for w i t h d r a w a l , L ~ S L I I I I I ~

s e v e n d a y s f o r sai r ings o r as a g r e e d for t ime d e p o s i r s . n o t i c e Sor

w i t h d r a w a l is generaI Iy w a i v e d for s a v i n g s deposits.

2.3 CHANGESINEQUILIRR~WI~ISTOCKPR~CES

In t he w o r d s o f Fabozz i , h4odigI iani a n d Fcr r i ( 1 9 8 1 ; 2 4 2 1 ,

"S tock marke t p r i c e s a r e [lot cons ta r l t , 1 1 1 ~ ) . u n d e r g o violc'ni

c h a n g e s at t imes" . Fo r e x a m p l e , on O c t o b e r 1987: t h c D u w Jones

a v e r a g e dropped 'oy 508 po in t s , and the a v e r a g e s t o c k Iost ahour 2 ;

c - p e r c e n t o f its v a l u e in j u s t o n c d a y . 1 o s e e how s u c h c h a n g e s can

o c c u r , let us a s s u m e tha t s tock X is i n equi l ibr iur i l , se l l i r lg ;i r i.i

p r i c e o f N27.27 /k pe r s h a r e . I f ' a l l e x p c c t a t i u n s w c r c exi ic t ly rnt:t,

d u r i n g t h e next yea r t he p r i ce wou ld g radua l ly r i s e ro N 2 8 . 6 3 / k , o r

by 5 p e r c e n t . H o w e v e r , many dift 'ercnt e v e n t s c o u l d o c c u r t o cuusc

a c h a n g e in t he e q u i l i b r i u m p r i ce o1'1he s ~ o c k .

L E v i d e n c e s ~ ~ g g e s t s tha t s t o c k s , a n d e spec i a l ly those o f ' l a r g , ~

b l u e c h i p c o m p a n i e s , a d j u s t r ap id ly to disequilibrium si tur i r ions .

4 5

The Ef fec t of t h e Coupon R a t e

A bond? ccopori r a l c a l s o affects i ~ s price scnsit ivit) , . M o w

same required y i e ld , the lower the coupon raTc, rhe grzarer re 1

price responsiveness for agivcri changc i n [ h e required y i r l d .

A spec ia l type ofbond wish no coupan rare is calFed n zero-

c o u p o n bond. The invcstor w h o purchases a zero-coupon bond

rece ives no periodic inleresi pilymlsnl, insicad, ~ h c investor

purchases [he bond ar a price below iis pr inc ipa l a n d rece ives the

p r i n c i p a l at the m a ~ u r i ~ y dace, The di f ference hctween r h e

principal and the prices a t wh ich the zcru c.oupnn is purchased

represents i n t c r e s t ea rned by cht: invesror w c r the bond's IiI't:.

A zero -coupon bond wiII have grta1t.r price se~lsitiviity 111ati

a b o n d with n cnapon r a w se l l ing ar the same rrquircd glicld and

with the same nialurity.

b The E f f e c t of t h e L e v e l of Yicfds

F o r a given m a t u r i t y , t he p r i c c changc a n d t i i t : pr t r c tu l age

M e a s u r i n g P r i c e Sens i t i v i ty t o l n t e r e s t R a t e C h a n g t s :

Durat ion

In managing the price volat i l i ty aT a pur l f o l ia, ~rni~rkcr

ra te changes [hat encompasses a i l th rec f ac to r s lh81 is the m;r~s~r i~?. ,

the coupon r a t c a n d the kveA arintercst rates.

A very ~1.iefi11 w a y to approx imate an asset 's p r i c e s e n s i t i v i l y

or decreased by asmal l number ofbstsispoints.

This mcasu rz of price sensit ivity is popularly referred 1 0 as

the b o ~ ~ d ' s dura t ion . The r e l a ~ i v c m a g n i t u d e of' t he d u r a ~ i o l n 0 1 '

' b o n d s is c o n s i s t e n t w i th t h c p r o p c r t i c s ot' f i n a n c i a l a s s e l s

Speci f ica l ly ,

4 8

R E F E R E N C E S

Okafor F,O., 1983, "Investmenl T)ccisiuns" E v a l u a \ i o ~ i 01'

Projecrs a n d SecurIties,Cas.se!I Pt~bl ishcrs L ~ c l . p. 1 5 - 1 6 .

Fabozzl , h4,wIigliani and F e r r i , 1 I "E.:ssc:nt ials 01'

Manager ia l Finance : 2"' E7d. I l insdalc, Illinois, t h e D r y d c n

Press, P . 3 .

Okfor F.O.. O p . C i t P . 14.

Ernekekwut: P., 1996, "Corporate Financial hlansgt .mc.~i t" 2""

Revised Ed i t i on ( P u b l i c a t i o ~ o f BasedOAU K i n s h a s a - % a i r c )

P . 1 1 3 - 126.

Odift:, 0. 1984, " U n d e r s t a n d i n g the Nige r i a Stock M a r k e l "

Vantage Press, I n c . N e w Y o r k p . 2 7 .

Emekekwue I). Op. Ci i p. 1 19.

N w a n k w a , G.O., 1988. ' T h c Nigeria Financial Syslcnl

"Macmi l lan Publishers . 1-ondon, P . 134.

Ernekckwue P, Op. C i t p . 126

Ernekekwue P . "Inves t ing at i h e Stock Escht lngc" . r h c

F i n a n c i e r 2nd Ed. 19781'79 P . 1 2 7 .

1 1. N w a n k w o G . O . , I99 I , "Bank ma nag ern en^, Prirliciplcs alnd

Prac t ice" M a l t h o u s e Press L i m i t e d . 1 " E d . P . 27 .

. 1 3 . The Nigeria Stock E x c h a n g e , Fac t Book 1997, p . 1 8 ,

CHAPTERTW R E E

3. J INTROD L'CTJON . This chap ic r discuses rhe techniques ~ ~ s c c l i n g a t h e r i n g [ h e

data which are used En a n s w e r i n g research q u e s t i o n s

3.2 R E S E A R C H Q U E S T I O N S

As s t m d earlier, the f o l l o w i ~ l g q u e s t i o n s sha l l g u i d c irs i n

ou r research into t he rcsearch topic . T h e a n s w e r s t o these

q u e s t i o n s s h a l l :hrctw more light on the topic wh ich sha l l in lpro i fe

our unders t and ing ofthe i s sucs invo lved .

1 . Wha t arethe a v a i l a b l e fisccl incornc secur i t i e s i n Nigcria '!

2 . What is the lcvei o f p r i ce vola t i l i ty o f Sised i n c o m c

securities i n Niger i a?

3. W h a t itnpacd h a s the p r i c e ~ ;o Ia r i I i t y cf laractcr isr ic o1' I ' ixcd

income sccslrities o n i t ' s i nves tmen t?

3 .3 RESEARCHDESIGN

A c c o r d i n g to A s i k a ( I 9 9 1 : 104) rcsearch design helps

resea rcher to develop a mental i r n n g s orrht: slruct i l re Sor g a t l ~ c r

the d a t a a n d the a n a l y s i s tha t $ k i l l follow. - .. In th is srudy, survey research nzethod was used primary d a ~ a

were c o l l e c t e d 1Iirnt1g11 qucst ionnairc and pcwsoalal i n ~ c - r v i e w .

3 .4 SOURCZSOFDATA

The data f o r t h e research were oblaintcl Sram bolh pr ima!->

and s e c o n d a r y sources . T h e prir~zll-y cliraa were obtained I ' rom

respondents t h r o t ~ g h p e r s o n a l ilrtcrvicws rind q u e s r i o m a i r e .

Persona1 interview w a s u s e d i n gat!-\ering inf 'ur rnat ion f rom penp1~:

wi th in off ice e n v i r o n m e n t because orits conive~~iencc.

The secondary d a t a used !'or t he r e sea rch w e r c o b t a i n e d I'ro111

s econdary sources a s follows: the NIgcriarl Srrrcl, Exchange d a i l :

off icial l ist , S e m i n a r papers , Newspapca rcpurns, Hooks, J o u r n a 1 s

b a n d In te rne t .

3.5 M E T H O D OFDA TA COLLECTION

The methocf o f c o I I e c ~ i o n o r d a l a was through i n ~ c r v i c w of'

secur i t i e s d e a l e r s and Chief E x c c u r i v c s ol' somc prncl ic ing

l i c e n c c d stock-brokers- The stiuclured questions dwel t 011 pr icc

w

v o l a t i l i t y c h a r a c t e r i s ~ i c 5 off ixcd income scctrritics i n N i g t s i ; ~ .

3. 7 DETER:IfINA T I D N OFS.~lA!PkE S IZE

For eas ie r c o l l z c ~ i o n o f t l n l a , ttvo l iccnced s lack broking

f i rms , t h a t is he A p c s Securities a n d the Gcnera'l Sccuri~ ics I . [ %

banks.

C O L L E C T E D D.4 TA

The coI lec tcd d a t a w c r e a n a l y z e d u s i n g sfa~isrica1 char.! a11.d

graphs and a lso strategies werc recommez~dcd based oil rhe C

ana lys i s .

B e h a v i o ~ ~ r a l Sciences , Nigeria; L o n g m a n N i g e r i a P lc . p p , .

13, 104.

2 . A n e k e , O n w u r a ; 1 9 9 8 , I n t r o d u c t i o n to A c a d e m i c I<cse;lr-cl~

M e t h o d s , G o s t a k P r i n l i n g a n d Pub. Coy L t d . p p . 1 4 7 to [JO.

C H A P T E R FOUR

DA TA P R E S E N T A T I O N A N D A N A L YSIS

EXCHANGEAND ITS INTERPRETJ TJON

Fig - Tab le ,

-. .C

,h~ Nigerian STOCK EXCHANGE

5 6

One m a y no t be a b l e to d o j u s i i c c t o t he t o p i c on pricc

rntsvelnenE olf quoted s e c u r i t i e s o n 111c s t o c k ~ n a r k c l w i ~ l i i l ~ ~ r

in terpre ta t ion o f t c r m i n o 1 o g i e s rcf ' lccted on t h e d a i l y oC'f'iciiiI h a .

T h i s is an authoritalivc d o c u m c ~ r t i s sucd by t h c c o u n c i l a i r l ,c

. N i g e r i a n Stock Exchange s h o i v i ~ l g u s e f u l corporate dara on d a i I >

business ratin:: for all q u o t e d s z c u r i t i c s to a id invcs~ors i n

a p p r a i s i n g or r i i~n i tor ing the i r p o r t f o l i o p c r f o r l n a n c e f u r b e h t

r e s u l t s .

F ron t pagc o f t h e d a i l y oSficiaI l is t s h o w s d a t e 0 1 ' ~ i i I i d i l y 0 1 '

the d o c u ~ n c n t , types of sucu r i t i e s l i s t ed , nameIy o r d i n a r y s h a r e s ,

government securities, indus t r i a l loan a n d pref 'ercncc s t o c k s or

bonds . It a l s o s h o w s the key boa rd fo r s i g n s l i ke (+ ) p l u s m e a n i n g

l h r r c is dcrnar\rf or b id or d c s i r e to p u r c h a s c ~ h c secu r i ty b e a r i n g i t

Similarly, r h w c is ;(-I minus m e a n i n g tha t t he re i s s u p p l y o r ol'l'cr

o r dcsire to se l l !he security b e a r i n g i t . F ~ i r t h e r m o r e , w e h a v e ( c x -

current: i n t e r e s t payabledo ncw buye r s . A l s o , thesc c s i s l s ( X I ) ) e x - L

dividend, or [XSCP) ex-scrip to dcr .ote i v i t l ~ o u t c ~ ~ r r c r - 1 t di~<iclcncl

or aCter bonus or sc r ip , r e spec t ive ly .

5 7

, - 1 hese signs u s u a l l y r c i n a i ~ l i n f ron t o f affccretf s ecu r i r i c s

p r i c e f o r a d u r a t i o n o f ( 1 4 ) d a y s to a l l o w l e d g e r s o f bene l ' i c ia r ics

t o be a d j u s t e d a c c o r d i n g l y . I f you buy a n d s e c u r i t y XII) o r XSC:I',

i t means t h a t the mnrkct price has becn rlircou~rted to d i s q u a l i f y . you f r o m partaking from s~1e.R currmt benefits. Wlieruas, if'j.ou

you becamc.st i .arcl~oldea. Otlarr I I M I I t11i.s~" s igns , t h e r e is pro i . i s iun

f o r marke t capi!a!ization and index f o r quo tcd e q u i t y s c c u r i ~ i e s oli

given q u a n t i t y ot'!he security w i ~ s fratlcd a n d provision fo r in t c rcb r

paymen t made .

for ascertaining mode o f share pricc m a w m e n t and as n r o d ro

assist i n predict ing Fuaurc performance r r T share prices n c y s o m e

ex tend , every thicg be ing e q u a l . Based on a praccica! exper i ence . there m a y be n e e d to crtate new columns Tor n e ~ a s s c t per sha re for

each company so a s to make investors t o rer7Iize [Ire danger o I ' w h a t

ex ten t to go at bidding f ~ r s e c u r i l i c s .

Three t>*pcs o f ' f ixed income sccur i t i e s cal-1 b c iden l i f i cd

these a re :

1 . G o v e r n m e n t Development Srocks

There are also called Eligible D z v c l o p m c ~ ~ t S t o c k s . 1'11ey L I L

G o v e r n m e n t b o n d s issued perirarf i c n l l y o n a ~ n c d i u r n a n d 1oug

t e r m bas i s to ra i se f u n d s Cor f i ~ l i t n c i r i g govc.rr lr i lcr l[

d e v e l o p m e n t prograrnn-les. l ' h e y a r e r cga rdcd a s s a l ' e j ~

a n d most secu re becausc i t is nssirmed t h a t govE:rnI~-leilr I I L L ~ c r

5s'

defaul ts on its obl iga t ions . I-lcnce !hey a r c also ca l l ed C ' r i ! ~ -

Edged Securi l ies . Their safety and low risk results i n rht

low reTLvFfi!3 and yield w h i c h t h e y o f fe r i n v c s ~ o r s . I n ~ r r e s t is

u s u a l l y p ~ i d twice a year. The major subscribers ul' Ihese

stocks nre the National Social Insurance T r u s t I:tind,

C o m m e r c i a l B a n k s , I n s u r a n c e C o m p a n i e s . Snrcings

Ins t i tu t ions , P u b l i c Corpora i ions and [he Central Bank

2 . Corporate Bonds and Debentures :

There arc loan stocks issued by privalc a n d p ~ h ! i c l i n ~ i ~ c d

1 iah i I i ty companies LO f i n a n c e t h e i r expansion progratnnlcb.

Since t h e y a r e issued by companies who are suhjeci la [ h e

vagar i e s of t h c bus iness world , t h e y tend to bc rnorc r i b l ~ ~

t h a n government bonds and [herefore a t l rac l h i g h e r yields.

There a re var ious types of' corpora te bonds , T h c mortgage

bond is a promissory notc w h i c h has specil ' ic and iiIcn[iL'icd

asse ts p ledged a s collateral w h i c h cannot be d i sposed ol'l'

d u r i n g the durat ion o f the bond without the c o ~ i s c n ~ o f thc.

bond holders.

The clebcnture b o n d , on the o t h c r hand is s e c ~ ~ r t d b y

p r o p e r t y no t o t h e r w i s e plcdgeci o r g u a r a n l z e of' t h c c o m p a n y ' s

d i r e c t o r s . The income bond on ly a t t r ac t s i n c o m c a n d interest 1 ~ 1 1 ~ 1 1

t h e i s s u i n g c o m p a n y e a r n s i t . C o r p o r a t e b o n d s as invcsllnc111 . o u t l e t s h a v e ccrtnin a d v a n t a g e s a n d d i s a d v a n t a g e s . T h e

a d v a n t a g e s i n c l u d e p r i o r i t y e n t i t l c m e n l s L O e a r n i n g s a t id

r e p a y m e n t o f p r i n c i p a l b y the c o m p a n y o n l i q u i d a t i o n . cnjoyme111

o f a f i xed r e tu rn w h e r h e r the company i s doing w e l l o r a n d

c o n t r o l i n c a s e o f dr.l'au11. H o w e v e r , becaus t l ahe i n l c r c s r r a t< is

f ixed i t t ends to beeas i ly e roded by i n f l a t i o n .

Types of Covernnicnt Bonds

They must be guaranteed by [he federa l govcrnmen1.

c ) Local Gavernrmnr Bor~ds: These bonds. by dc l'init ion. 'rrc

issued by lacal government ccs~rnciIs to f ' inancu v i a b l e se l lm-

l iqu ida ted projec ts . I lencc , they are a l so ca l l ed rcvcnut:

bonds s i n c e they must be l iquidated from reIJenalcs carntcd b y

the projec ts s o f inanced o r repayment to the bond holclcrs

would be d o n e by federal author i t ies through deduction a t

t he s o u r c e o f r e v e n u e al locat iorl to the issuing incal

government .

d ) Municipa!ZIonds: T h e s e bonds a r e issued by city s l a t e s and

l a rge capi ta1 c i t ies that can generase the necessary r e v e n u e

to redeem them at maturity from the projects so f i ' r l anccd .

These bonds are also ca l led revenue bonds.

Other v a r i a n t s of bonds are :

i ) Fixed Rule Bonds: These bonds have f ixed in teres t ra tes

payabIe periodical ly to the bondholders unt i l matur i ty

i r respect ive o f t h e market / economy.

i i ) Floa t ing R a t e Bonds: Interest ra tes on these bonds a r c

62

a l l o w e d t o f l oa t in l ine wi th p r e v a i l i n g in t e r e s t r a t e s i n t h c

ivh ich ra tes c a n f loa t is zgrecd u p o n i n the bond a g r c e m c n t

b e t w e e n r he i s suc r and the bor~dholc lcs . . i i i ) Zero-Coupat7 Bondx: 2-hesc a r c b o n d s that pay no in t c r c s t a t

a l l ; o n l y the p r i n c i p a l a t ma tu r i t y is r e f u n d e d to ~ h t '

bondholcier . The a t t r a c t i o n o f t h e s e b o n d s is tha t t h c y a r e

solcl a t a d i s c o u n t , that is b e l o w the i r a c t u a l o r n o m i n a l

v a l u e s . H e n c e they a re ca l l ed d e e p d i s c o u n t b o n d s . LVhat [ h e

b o i ~ d h o t d e r e n j o y s i s the d i f f e r e n c e bctwecrl thc re t leemablu

p r i c e a t matur i ty a n d thc pu rchnse p r i c c . IIc a l s o a\ ,c~icls

i n c o m e t ax on in t e r e s t i n c o m e .

i v ) I r r e d e e m a b l e D r h r n ~ i r r e S ~ o c k : T h i s i s n b o n d i s b u s d i n

perpetuity. I t h a s n o f i x e d m a t u r i t y dictc a n d c o u l d

t h e o r e t i c a l l y , b e he ld f o r e v e r . I I cncc : i l is r r . la t i \ ;c . l ) ,

i l l i q u i d , a l t h o u g h i l b e a r s a l i i g h c r c o u p o n ra tc t h i l n O I I I C I

r e d e e m a b i e s t o c k s .

be repaid a t the cxpirr t r ion of the life/tct~r>r u f r11c hund or a t

r e d e m p t i o n . This price is called w a l l premium.

v i i ) Secured Debenture Srod: This is a corporate . b m d [har is

b a c k e d by i d m t i f i e d physics! assets of the issuer as securi ty

until i t matures . In c a s c of dz fau l t , rlle b o n d h o l d e r c a n

foreclose on t h e w pledged a s s e t s to r e a l i ~ e his c r e d i t ro tht:

issuer.

col la tera l to secure i t i n tthe evenr o f dct 'aul t by tlae issuer.

Ilowevcr, to compcnsalc for this risk, [he i n ~ e r c ~ t rare bornc

by a n a k e d r i sk , the in tc rcs t r a t e borne b y a n a k e d d c b c ~ ~ t u r t

b is u s u a l l y higher lhan !ha t of a sccurud d i b u n t l ~ r . ~ .

i Conver l ib lc D e b e t ~ t r ~ r e S I O C ~ : TIiis b o n d is issucd w i t h rhc:

ordinary shares of the issuing company a'! a speci f ic d a ~ s and

a t a p r e - d c ~ e r r n i n c d ~ p s c i f i e d conver s ion pr icc .

x i ) Debenture rvirfr Wiarrun~s: This is a c o r p o r a t e b o n d [ h a t .. gives thc Irotder r h ~ option u f b u y i n g a spec i f i ed n u m b e r 01'

the sha res of the issuing company at a prc- r lc tcrminsd pice

on ar before a spec i f i c date i n tIrc f ' i~ tur t ' .

before its maturity a t the instance 01' rht . b o n d Iiclldcr bl.11

only a t a discount.

3 . Preferred Stock

Thesea rchyh r id securities t h a t possess the features o f botid:,

a n d some of the features af corninan stock. ?'he dividend i u t ' ixcd

a s a pe rcen tage of the par v a h t and may b e c u m u l a ~ i v e ur non-

cumu1ative. Some pre fe rence stock ate red~emab!c . atad others a r e

convert ible to common stock aa a spuc i f i ed p r i c e d u r i n g a

b

specified period. Thc major advantage o f p re fe r red s tock to 111e

inves tor is the steady income which is f i xed and its pr-ef'erencc

6 5

o v e r c o m m o n s t o c k . T h e d i ~ ~ ? C I \ . ~ a n t i ~ g ~ ' s i n c l ~ i d t t h e 1 0 1 ~ I . c L u ~ ~ . ~ LIII

the preferred s t o c k e v e n t h o u g h i t bea r s a subb tan t i a l p o r t i o n of

o w n e r s h i p r i sk . S e c o n d l y , i nvus io r s h a v e n o l e g a l l y u n l'orr:c;1I~Ie'

r i g h t t o d i v i d e n d s . CI

4 .3 T H E PRICE V O L A T I L I T I E S O F F I X E D INCOitfE

SECURITIES I N NIGERIA 0 VER A TEN Y E A R PERIOD

4 .3 .1 T A B L E I . BQ(VDIS

Source: Compl ied from N S E ' s d a i l y o f f i c i a l I i s ~

F rom t h e a b o v e t a b l e i t can be daducccl tha t [ h e r e is a

a c o n s t a n t m o v e m c n t in t h e p r i ce s o f bond f rom the y e a r I 9 4 1 ro

2000 . T h e p r i c e is c o n s t a n t l y at N 1 0 0 wi lh n o u p w a r d o r

d o w n w a r d rnuvenlents .

This trend i s fur thcr i l l ~ ~ ~ t r a ~ c d using n graph c h a r t below ro

s h o w t h e !eve! ofprice movement nl'bsnds f o r hat period

Year

The g raph ica l c h a r t abovc i m p l i e s that lherc is n consran1

movement i n [he prices o f b o n d s avai lable in N i g e r i a f r o m 199 1 ro

b

2000. I t m a i n t a i n e d a sfeady p r i c c o f N 100 for t h a t p r i c c .

T A B L E 2

4.3.2 I n d u s t r i a l L o a n s

6 J

x > p r o v i s i o n tha t a l l o w s i ts h o l d z r to c o n v e r t i r i n lo tkc

o r d i n a r y s h a r e s o f t h e i s su ing c o m p a n y a t a spec i f i c : dalc a n d

a t a p re -dc t z rmined spcc i f'icd conversion p r i c c .

xi) Deberlrurc wirh W N ~ Y U Y I I S : T h i s is II c o r p o r a t e bond r h a i

g i v e s t he h o l d e r t he o p t i o r o f b ~ ~ y i n g il s p e c ~ f ' i e d n u n ~ b c r of'

t h e shares o f ' t h e i s s u i n g c o m p a n y at a p rc -c le ; : t e r~nined p r i c : ;

o n o r b e f o r e a s p e c i f i c d a t e in t he f ~ ~ t u r - e .

x i i ) Rerracrublr Drbrnrltr-e S!ock . This b a n d i s r . edec l l~ ;~b !e

b e f o r e i t s ma tu r i t y at the i r ls tance of' t h e bond holdcrr b u t

o n l y a t a d i s c o u n t .

3 . Preferred S t o c k

T h e s e a r e hybr id s e c u r i t i e s that possess the f 'catr~res o l ' b o ~ ~ d . ,

a n d s o m e o f t h e f e a t u r e s of' c o m m o n s t o c k . T h o diviclend is f i xcd

as a p e r c e n t a g e o f t h e p a r v a l u e a n d m a y b e c u l n u l a ~ i v e o r rim-

c u m u I a t i v e . S o m e p r e f e r e n c e s tock a r e r e d e c m a b l e a n d o [ h ~ ' ~ s a ~ - L

0 8

Using S n s i t h k l i n c Hecchanz lY igcria PI..G n s e x a m p l e . from

1991 i t stock maintained a steady price 0f'NIOC) u p l o 1895 ;111cl

f rom 11196 to 2000

On t h e o thc r hand , Ashakaccni company has i t sroch price: a t

zzro level from 199 1 to 1995 and ~ h e r ~ a f l c r com~nenced on up\.vard

movement in N 9 0 f r o m I 9 9 6 to 2 0 0 0 .

FieId research had r e v e a l c d that ~\l.cse price l ' S r ~ c t u v r i c r ~ s

(upwnrd/downwarcl) is in consonan t with the s l a t e 01'tIle ec0110111:,

a n d the pe r fo rmance oS the conipanies , a s srock n ~ n r k c i s a r c it

reflection o f t h e e c o n o m i c s in which they opc.1.uts

Other m a j o r fac tors a re thc croding. c o n s u m e r p i ~ r c h ; l s i l ~ g

power as a t t h a t time a n d the genera l ecorlornic rrcncl i n Nigrsrii i

wh ich was charac ter ized b y poIit icul i n s t a b i l i t y .

Tlic sitl~atiorli is fur ther ana lyzed us ing tht : g r a p h i c a l c h a r t

b e l o w :

Chort 2: G r a p h i c a l i t lus t ra t ion o f p r i ce volar i l i t i es of' int luslr ia l

loans i n Nigeria f rom 1991 to 2 0 0 0 us ing S m i ~ h k l i n c B e c c h a n ~

Nig . Plc

I I I I I I I 1 I I 91 92 93 94 95 96 97 98 99 200

Year

Srnithkl ine Beecham Nig PLC f luctr~ates bur nor a? a cons~a r , ! r a t e .

This situation applies to mosl o l the o ~ h u r i ndus t r i a l loans i r l

N i g e r i a within the period o f 1999 ra 2000 as i t is as s h o w n on i h c

price table of i n d u s t r i a l l oans above t h a l is table 2.

T A B L E 3 : I l lus tra t ion of' P r i c e Y s l r t t i l i ~ i c s o f N i g e r i a n

Government Deve loprnen~ Srocks from 19Q I 10 2000

70

4.3 .3 Covernmclnt S t o c k s

I N ~ g r r ~ r GOVI.

Ucvclopmcnl Stack

Source: Complied f rom N S E ' s o f f i c i a l da i l y l i s ~ .

P - 1 Iie above table impIics that ~ l ~ u r t ' is a w i d e gyration i n t l i u

f luctuation ol'prices of governrncnt srocks i n N i g e r i a cspccii!ll>

from 199 2 to 1993. A n d t h e r e after m a i n t a i n e d a c o n s t a n t p r i c e

level from 1991 to 2000.

T a k i n g lac first srnck on thc a b o v e t a b l c t I l : ~ r is t h c ( F R N 13 ' "

DS 2000), there \ faas a ~ n o d t r a t e c lccrrnse f rom N 8 6 . 5 5 1 \ i n 199 1 to

N85.74k i n 1993 resuIf ing 10 a dif l 'c rencc o f 0.2: I k . ' f ' l~is is a ~ n ~ i c h

smal le r d e c r e a s e when comp:~rect to r l a ( 01' 1 9 9 3 . H c t ~ v c e n I 0 9 2 to

I993 thercwas a d e c r e a s e i n p r i c e to :hc l u n c o f ' N S . 4 1 k . A l l 1hc5c

is a t t r i b u t a b l e to a la rge exre~lt on t h e poIi1icaI arihcs a n d i n f l a t i o r ~

w h i c h c r ipp led the Nigcria economy d u r i n g [h ie p e r i o d . Albo bo

m a n y measures were introducecl to cur d a w n thc cf ' fccts o I' r t i c h c .

7 1

i n f l a t i o n . such 1nn:;lsures i nc ludcs [ h c u s e of' ~ ~ ~ o n c t a r y p o l i c y .

in teres t ra tes , moral s u a s i o n a n d o p t n m a r k c 1 operillion introrluc.cd

in 1992 bur forced i n t o u s t i n 193. 1:rom 1 9 9 4 2 0 [ ~ 0 v, c

witnessed a s t c a d y p r i c c o f N 9 1 . 9 8 k . i s is g r a p h i c a l l y

represented below:

Year

Deve lopment Stock for tht. pcrir~cl c m . c r c d I, rhis rc .sc~rrch

f l u c t u a t e s bu t no t a t a c o n s l a n l r- at^.

T A B L E 4: I l Iustrat ion o f Pricc VoIa t i I i t i es of Preference S t o c k s

in Nigcr ia Form 199 1 - 2000

4.3.4 Prefcrcncc Stock

SOURCE: Compi led f rom NSE's Da i l y Off ic ia l L i s t .

The table aboveshow that there is c o n s t a n t movemen1 i n t h e

prices sf available preference stock i n N

Wilhirh these years ~ l l e p r k c was rnaintr-l

STOCKS

A i p r ~ n r N l g PLC

Hagcrncycr

CCRPS

igesia from I99 1 to 2 0 0 0 .

incd a t N 100.

1995

I I I I I I t - - - - - t v

9 1 92 93 94 95 6 97 98 99 200

Year

1991

,00

1906

100

100

1992

100

1999

IOU

11111

, I00 ! I 0 0

I

)Onu

100

I ~ I I J

1997

100

100

I993

100

1998

100

100

I994

100

I I U U

7 ;

4.4 FUNllAf i IE,VTAJ. FACTORS D E T E R M i N I N C STOCK

PRJCESIN T H E M A R R E jr

F u n d a m e n t a l f a c t o r s p r cd i c t s t ock p r i c e s a n d their. b e h a \ lour.

f rom factors tha t are bas i c to t h e c o m p a n y , i t s incl i~st ry o r t h t

economy, as fotlows:

2 . C o m p a n y related f a c ~ o r s : T h i s incIIh~dcs

a. E a r n i n g s and gsowth .ate

b. D i v i d e n d s saabi l i ty a n d g r o w t h

c . TIIF g rowth po t en t i a l oi ' thc c o m p a n y

d . T h e qua l i ty ofthe c o m p a n y ' s management

e . hfcrger and acquisition nrrangemcn I S

f. L a b o u r u n r e s ~ s

. Market conditions f o r raw nln tc r ia l s , components and

f in i shed goods

h . I n n o v a t i o n s a n d t e c h n n l o g i c a l breakthroughs.

3 . I n d u s t r y - R c l a ~ e d f a c t o r s : 'I his a r c

* , a . I he d c m a n d / s u p p l y situation Sur thc i n d u s ~ r y ' s g o o d s .

b. Raw material costs and regularity o f supply f o r r l lc

i n d ~ ~ s t r y .

7-4

c. E f f e c t s o f g o v e r n m e n t p o l i c i e s , b a n k c r e d i t

avai labi l i ty to the industry and impact o f inf la t ion on

the indust ry .

4 . Economy - Related Factors : They are

a . T h c g e n e r a l e c o n o m i c o u t l o o k s a n d b u s i n e s s

pe r fo rmance .

b. In tcres t ra tes , inf lat ion and changes in money supp ly .

c . Budget d i rec t ions on employment and balance o f

payments

d . Levels o f i nves tmen t and cons~ i rnp t ion

e . S t reng th o f the currency vis -a-vis o ther in ternat ional

cur renc ies .

5 . Po l i t i c a lFac to r s

a . Pol i t ica l s tabi l i ty and the possibi l i ty o f loss of'

invcs tment and d rop i n bus iness ac t iv i t ies a s a resul t

o f t h e ou tb reak o f hos t i l i t ies .

b. Change o f government and poss ib i l i t ies of' ricw

go i . e rnmen t p o l i c i e s t ha t migh t a f f e c t b u s i n e s s

ac t iv i t ies .

6. V o l u m e of ' r racl ing

a. Tllc vo lume o f t r ad ing t o some e s t a n d ac tu ; t l l y

mcasures thc degrce o f inves to r s ' ~ M O I ~ O I I S rcgarcl i r~g

a srocli and somet imes i t t akcs volume 01' t rad ing to

renily m o v c [ h c pr ice o f a s t o c k .

7 . Money Supply

T h e r e t ends to be n c lose re la t ionship be lween money s ~ r p p l y

and s tock pr iccs bccausc as the supply incrcases,dispoosnhIc

incomes a l s o inureascs, i n flat ion increases and the d e n ~ a n d

for va r i ab lc income sccur i t i c s i n [ h e rorm o f s h a r t s a l so

inc rcases . T h i s causes [he nominal pricu of s t o c k s to

inc rcases ; i t t h c same rate as ~ h c g e n c r a l pr iuc Icvc1.

4 .5 ~ I E A S ~ J R E S T O D E T E R I ~ ~ I ~ ~ ~ E T ~ I E P E R F O R I ~ I ; I I ~ ~ C E O F

F I X E D i N C O M E S E C U R I T I E S INNIGI'RRLl

.-. I he fo l lnwing mcasures can I ~ ~ W L ' \ : C ' I - , IJC L I S C : ~ L O J I I ~ ~ C I I I C

p e r f o r m a n c e of f'ixcd income s c c u r i ~ i c s i n N i g c r i a .

1 . S tabi l i ty o f ea rn ings of the i s su i r~g cornpan), . l h t s is

7 G

m e a s u r e d b y rhc in te rcs t c o v e r a g e r a t i o s o r i n t c r r s ~ c i l \ : c l - .

I t m e a s u r e s h o w Inany t i m e s rhc profi t ea rned by 111,-

c o m p a n y c o v e r t he i n t e r e s t on its b o n d s , A h ighe r c o i # d r i s

preferred a s i t m e a n s t hc r isk of'def'ault w i l l b c lou;.

. . 2 . Gear ing Level 01- L e v e r a g e : This rneasl.lrcs the C X I C I I ~ 0 1 '

w h i c h e q u i r y i n v e s t o r s a r c p r o t e c t e d i l l t h e e v c n ~ of'

I i q u i d a t i g n . A low g e a r i n g Ic\fcl is p r c f c r r e d , u s ~ ~ a l l y i n ~ h c

n e i g h b o u r h o o d of' 30% to 4 0 % o f t o t a l a s sc r s o r 1 0 0 % 0 1 '

equ i ty .

3 . R i s k of D e f a u l t : T h e r i s k of 'def 'aul t of '~11c i s s u i n g C ~ I I I P C ~ I I ) I

is m c a s u r e d by the i n t e r e s t c o v c r , t h e g e a r i n g l e v e l , t hc

l i q u i d i t y p o s i t i o n o f ' t h e c o m p a n y i n t e rms o f ' a v a i l a b i l i l y of'

c a s h to h o n o u r i n t e r e s t p a y m e n t s , p r i n c i p a l r spay rncn t s : ~ n d

o t h e r o b l i g a t i o n s , p a y i n e ~ l t r cco rd of' t h e c o m p a n y o n i ls

p r e v i o u s debts and i ts v a r i o u s investments i n t e r m s o f t h e i r

a b i l i t y to g e n e r n t c i n c o m e to h o n o u r o b l i g a t i o n s .

7 7

4 . C u r r e n t F i n a n c i a l P o s i t i o n : l 'hc c u r r e n t f i nanc ia l pos i t i on

o f t h e i s s u i n g c o m p a n y is ~neasu rcc t b y i l s \i*ot.kii-ig c a p i t ~ l .

o u t s t a n d i n g d e b t s a n d thc i r va r ious ma tu r i t i e s a n d r a n k i n g s .

T h i s a l s o he lps t he i n i l c s t o r to k n o w h o w s o u n d rhu corn jany

i s s u i n g the bond is a n d i ts a b i l i t y I O p a y in l c r e s l a ~ ~ d

p r i n c i p a l a s and w h e n d u c .

5 . Nature o f the i s s u i n g c o m p a n y ' s b u s i n e s s : A good bond is

usuaI!y by a c o m p a n y e n g a g e d in a b u s i n e s s wliicli is stm:;~cly

a n d g r o w i n g a n d wh ich has l i t t l e I ikelihoocl o f c x p u r i c ~ l c i n g

i n c o m e a n d i n c r e a s i n g the r i sk o f d e f a u l t .

6 . Qua l i t y o f t he i s su ing c o m p a n y ' s managemer i t : T h i s is

m e a s u r e d by the q u a l i f i c a t i o n s , c s p e r i e n c e s a n d t r a c k

r e c o r d s o f i t s hoa rd a n d s e n i o r m a n a g e m e n t a n d the i r a b i l i r y

to run a c o r n p m y p r o f i t a b l y .

7 . S i n k i n g f u n d p r o v i s i o n s : G o o d b o n d s a r c b a c k e d by s i n k i n g

f u n d s w h i c h a r c spec i a l f ' unds created a n d in to w h i c h

p e r i o d i c pay mcn t s a r c p u t f o r ret i r i ng the b o n d s on 1nat11riry

w i t h o u t d i f f i c u l t y .

7 8

8. L c v c I o f i n f l a t i o n : B o n d s a r c ~ t t r a c t i i ' e ii .hcn inf ' larion is Ioii

as thc e r ~ s i o r r o f ' i n i c r e s l i r i c o r n ~ i j r c c l u c ~ ) d . %'hen t h e l e i 21

:,, N. * . - - - q r

y i e l d s to a r t r n c t i n v o s t o r s . 1,. . F - ,

d r o p s . \\'hen irllcrcs: r;;:i: r ise . t l ~ c r c is ; I f a l l i l l r h t p r i ce of

these securities a n d this givcs a boos t to [heir y i e lds . 'I'liis is

because y i e ld a n d i n v e r s e rclationsl i p b c l w c c n ).icld a l l t l

p r i c e of a f i x e d i n c o m e secur i ty .

. . 1 1 . Borrower ' s j?ilnr?cinl p u s i r i o n : T h e f i n a n c i a l posir i o n o t'

terms o f a b s o l u t z saf'cty o t ' the d e b t s a n d thurzI'oi-c i ~ ~ v c s r o r s

,. , c s p e c t h i g h e r y i e l d s . I11c d i f f c r c n c e between t h e y ic i r i on

' y ie ld g a p ' .

i i i . D u r ~ / i o r z o f ! he loan: As tIlc lil'e e x p c c

loan increases so d o c s t h c r i s k a n d i n v e s

X 2

T h a t t h e main f a c t o r s w h i c h influence t h e p r i c c s e n s i ~ i \ ) i ~ \

o f f i x e d i n c o m c s e c u r - i ~ i c s in Nigcr ia a rc :

1 . The sa fe ty o f i nves tments i n f'iscd income S C C L I I - ~ , ics s I ) o u I d

no t be d e p e n d a n t on a n y factor like t h c a b i l i t y o I ' i s s ~ ~ c r s 1 0

genera te a d e q u a t e income to cover t h e clainls a n d oil ~ I I C

a b i l i t y o f the ra; lcro-uconon~y to operi l t t : a t stab113 p r i c c

levels .

2 . F a c t o r s l ike rhe m a t u r i t y , coupon r i l t t ;111d t h e s tar- t ing Ic\ .cI

o f yields shou ld bc c a r e f u l l y s tud ied by investors i n f'ixed

x 4

4. c.

I o e n c o u r a g e i n v e s t m e n t i n f ixed i n c o ~ n c s ee r r r i t i e s i l l

N i g e r i a : a w a r e n e s s o f t he b e n e f i t s of' ir?!;csring i n l ' i s cd

i n c o m e s e c u r i t i e s s h o u l d bc created to c n a b l c t i le P L L ~ I I C

k n o w t h e thc bcne f i r s i n h e r e n t in s u c h inves tmcnr . T h i s

cou ld be by

1 . Use of s c m i n a r s a n d s h o r ~ - l c r m courses 10 p r o \ idc

necessary educa t ion o n investing i n such s t e u r i l i e s .

. . 1 1 . By e s t a b l i s h i n g m o r e sccrr r i ly f i r m s and d i s c o u n t

hotises in p i a c c s o u l s i d c I . agos .

5.3 CONCL USJOM

In t h i s study, we h a v e been ab lc to e s t a b l i s h the r ~ i a i n ~ ~ p c s

of f ixed income secur i t ies nvni l i~b l t . En N i g e r i a , rile a g g r e g a ~ i o n o I'

the i r price volatilities charac\crist lcs o v e r ii ten y e a r p c r i o d ( 109 1

- 2000) a n d t h e d'aclors responsible for hat.

I t is o u r be l i eve t h a t t h e r c s u l ~ of ollr f i n d i n g s u r ~ d ~ l ~ c .

recommendations, i f f o l l o w e d , shal l bc o f i m m c ~ ~ s c bcncl ' i t to

f i n a n c e houses, ana lys t and t h e genera l p u b l i c w h o m i g h t W ~ I I I ~ L U

inves t i n f i x e d incumt l s c c u r i t i c s i n N i g e r i a

AIilc II . l . , A n a o A . R . , 1997; 'I'hc N i g e r i a n S m c k hlat.k+:~ ill Opera t ion R r v i s c d Ed i t ion? P. 53 -. 5 6 .

AIi le I I , I . 1984, "The Niger ian S toch E s c h a n g c : I I i s ~ o r i c a I pe r spec t ive , Opera r ions and U u r ~ t r i b u t i o n s ro Economic Dcvelopmcnt" , I3ullior1, V o l t r ~ n t . 1 1 . P , 65 .

A n e k e P.1;. 1998, In t roduc t ion t o Academic Resea rch M ~ ' t b d s , Gos tak P r in t ing & PuhlisI- , ing C o y I , td , Y.JI - 4 3 .

E m e k e k w u c , P,, 1996 , "Corporate Financia l M a n a g e r n e ~ ~ t " F3;lse Publ i ca t ion , 2"" E d i t i o n , 1'. i E 5 - ! 3 1 .

Fabozzi , ModigIian i and Fe r ro , 1994, .'Foundat ions o f F inancia l Markets a n d I n s ~ i t ~ i t i o n s , Prcnt ice I I i t I I

In te rna t ional 1'. 3 - 17.

I-Iorners, 1996, Ins ide the Yieid Duok: N e w 'Tools f o r 13ond M a r k e t S t ra tegy, Prent ice I l r - l l l & N . Y . l r l s~i tur t : 01.Finance P. 57 - 59.

N w a n k w o G.O. 1088, "'The Niger ia Financial Sys tem hfacmil lnn Publishers, I ,ondnn, 1'. i 34 - 1 3 8 .

Odife , 0 . 1984 , "Unders tanding the Nigeria Stock Market" Van tage Press, l n c . New York P. 2 7 - 3 1 .

Oka fo r F .O. 1983, "Investment Decisions" Evaluat ion of Projec ts and Secur i t ies (Casse l l Publ ica t ion , 1'. 12 - 16).

Olade jo R . 1395 "An Overview o f the Niger ian Capi ta l ~ a r k e ! and t!le Role of the Niger ian Stock Exchange i n the Economy; A Paper Presented at i h e Capi ta l Market Seminar ' 95 on Sourc ing o f 17~1nd from the Nigerian Capital Market P . 6 - 9 .

Osaze B .E . 1996, Unders tanding the Capita1 h/larket, I<cvised Edit ion P . 234 - 239 .

Osare t in 1. 1997 , Pr ic ing o f Secur i t ies and Replacement C o s t unde.r Deregula t ion .

The Niger ian Stock Exchange Daily Off ic ia l I . i s t , 199 1 to 2000.

T h e Nigerian Stock Exchange Fact Book 1997, P . 18.

Unpubl ished Lecture Notes on Managerial F inance for M B A Banking & Finance Student by Modebe N.J . (Mrs . ) .