Nigerian investors are increasingly choosing to invest in dollars for more significant benefits and the potential for larger returns. Dollar-denominated investments in Nigeria allow for consistent profits while avoiding the volatility of the Naira. Moreover, compared to naira investments, dollar investments are more accessible to a larger spectrum of people. There are many various kinds of dollar investment vehicles on the Nigerian market. Pillow Fund has consistently shown itself to be the preferred option and the best way to dollar investment platform in Nigeria. Learn more about dollar-denominated assets through this article.
Nigerians are investing in dollar-denominated assets to diversify their portfolios and lessen their exposure to naira depreciation. In recent weeks, the naira has been losing value against the dollar in the whole Nigerian foreign currency market. Long-term exchange rate depreciation in Nigeria is about 6-7% yearly. As a result, investors' interest in dollar-denominated assets has increased due to the necessity to protect against the sustained devaluation of the naira.
What Is Eurobond?
A Eurobond is a financial instrument issued on the market or in a nation where the native currency of that country is not used. Eurobonds are categorised as per the currency they are denominated in. Examples could be Eurodollar or Euroyen bonds. Eurobonds are also called foreign bonds, as they are issued in different currencies. Eurobonds enable businesses to raise cash in different currencies. Eurobonds are typically issued on behalf of the borrower by a global syndicate of financial institutions, one of which may underwrite the bond and therefore guarantee the sale of the entire issuance.
Advantages of a Eurobond
Benefits to the issuer
- Freedom and flexibility to issue bonds in a specific currency and country
- Makes borrowing of funds at low-interest rates easy
- Highly liquid assets, i.e., they are convertible to cash within a year
- Globally tradable, so there are lesser forex risks
Benefits to the investor
- High liquidity
- Diverse investment options
- Lesser par/face value
- Freedom to invest
Disadvantages of a Eurobond
- No regulations - A Eurobond is riskier than other debt securities because it is not governed in the home country.
- Currency exchange dangers - Eurobonds are subject to the political or economic risks of the many nations in which they are issued.
- High transaction costs - Since Eurobond trading is typically expensive, a broker is required.
What Is A Bond?
Bonds are high-security debt instruments that allow an organisation to raise capital and meet capital needs. It's a type of debt from private investors for a set period.
Organisations offer bonds for investors in main markets, including corporations, governments, municipalities, and other entities. Both businesses and governments use the corpus so obtained to finance operational and infrastructure growth.
Bonds are purchased by investors for their face value or principle. A portion of the principal is extended by issuers as periodic interest with either fixed or adjustable rates.
Advantages of Bonds
Customers benefit from bond investments in a variety of ways. Bonds have proven to be a reliable investment choice for clients who are wary of market risk due to the reliability of interest and principal returns. Bonds offer the following advantages:
- Stability – Bonds are long-term financial instruments that accrue guaranteed returns. They offer investors who are concerned about the volatility of returns from equity a low-risk option. Bonds are rather inelastic when compared to cyclical market movements, even though dividend income from stocks is typically higher than coupon yields.
- Indentures – Bonds with indentures provide a contractual obligation for borrowers to promptly repay the main balance to creditors. In addition to information about the par value, coupon rates, tenure, and credit ratings, they also serve as financial contracts. Due to their reputation in the securities market, companies that draw significant investments in their bonds are quite unlikely to miss interest payments.
- Portfolio diversification – Due to bonds' higher risk-adjusted returns on investment, investors heavily rely on these investments to diversify their investment portfolio. As a result, portfolio diversification lessens the likelihood of short-term losses because more investment funds are allocated to fixed-income resources rather than only relying on equities.
Limitations of Bonds
Bonds are a low-risk investment option, but they have some restrictions that buyers should be aware of. The drawbacks include
- Inflation’s influence – When the current inflation rate is higher than the coupon rate issuers are willing to give, bonds are vulnerable to inflation concerns. Due to the effect of inflation on the invested principal value, debt instruments that pay fixed interest also run the risk of depreciation.
- Limited liquidity - Despite being tradable, bonds are typically long-term investments with limits on withdrawals. In terms of liquidity, shares come before bonds because bonds are subject to several costs and penalties if creditors decide to cancel their debt.
- Lower returns – Bonds are offered by issuers with coupon rates that are often lower than returns on stocks. In a low-risk investment environment, investors get a steady amount of interest throughout the investment. Returns are considerably less than those on other debt products.
Why Is It Called A Eurobond If It’s In Dollars?
Bonds are typically issued by financial entities like investment banks on behalf of the borrower. A promise to the borrower that the entire bond issue will be sold in the primary market during the initial debt-offering procedure is implied if a bank will be in charge of the underwriting process.
The title "Eurobond" just alludes to the fact that the bond was issued in a different nation and currency, so please consider that. It doesn't need to be a European nation. Any nation in the world is eligible. For instance, China may issue US dollar-denominated Eurobonds.
How To Receive Returns From Your Dollar Investment?
Your choice to invest in the Eurobond Funds was a wise one. You can profit from your dollar investments in one of three ways:
- Dividends: Dividends are not always paid by dollar investments. If so, the payout cycle may be either annual or biannual. The returns on the Eurobond are sent to your account or automatically reinvested depending on your choices.
- Capital appreciation: This has to do with the dollar investment price increase. For instance, if you purchased at $10 per unit and it is now $12 per unit, your investment has generated a profit.
- Currency appreciation: This results from the shift in the Naira's value relative to the USD. Assuming you bought Eurobonds when the exchange rate was N350 to $1, as of October 2022, you would be receiving returns when there is a change in the value of the currency.
How To Invest In Eurobonds In Nigeria?
The procedure for buying dollar-denominated investments in Nigeria, i.e. Eurobonds, is the same as for buying domestic bonds. Either the main market at the first offer level or the secondary market for existing bonds is available for the purchase of bonds.
The investor only needs to fill out the form for a tender for the Federal Government of Nigeria or corporate bonds, submit it through one of the approved dealers, and then pay the required amount if the bid is accepted.
Your account must essentially be funded with the desired currency for banks. For instance, to purchase the standard Nigerian Eurobond issued in dollars, you must first load your account with dollars and then send an order for the bond purchase.
How Much Can You Start With?
The currency rate is determined by the current market performance. You may start investing in the Eurobonds offered on Pillow Fund right now with as little as $10 (the naira equivalent).
Dollar-denominated investments in Nigeria gather money from investors and purchase Eurobonds on the secondary market. A mutual fund functions similarly to a vehicle that enables you to purchase bonds so that you are not directly exposed to the risk of the issuer. Therefore, buying Eurobonds through funds like Pillow Fund is an option for both individuals and institutions. Because these funds work by pooling resources from numerous participants, you can purchase bonds with less than the required amount.