Behind every large public project and many companies’ long-term loans is a bond: an investor lends money for a fixed term in return for fixed interest and the promise of the principal back. Because bonds can be sold before they mature, their prices move every day, and the rule that connects them to interest rates is one of the most useful in finance.
In the same capital markets, technology is rewriting how money is paid, invested, borrowed and regulated. This topic covers the bond market, its structure in Nigeria and abroad, the features of government securities (price, interest, yield, return and redemption), how a bond price is calculated and why it falls when yields rise, and the effect of technology on financial markets and institutions, with its benefits and its risks. The next topic starts the study of working capital management.
Bond pricing is developed further in the topic on valuing bonds and preference shares, and the cost of debt later in the course. Read capital markets and the stock exchange first.
In 30 seconds
Bonds are debt securities issued by governments, agencies, international organisations and companies for a fixed term, with interest at a stated rate and redemption at face value. The Nigerian bond market is dominated by government bonds; corporate bonds are few; large issuers also use the international bond markets in dollars or euros.
A bond’s price is the present value of its interest and redemption at the market yield: the higher the yield, the lower the price. The return = interest yield + capital gain yield. Financial technology changes payments, investing, lending, banking and regulation, giving cost efficiency, collaboration, rapid innovation, better security through transparency and a better customer experience, but with the challenge of cyber-security.
The bond market
Bonds are debt instruments issued by governments, government agencies, international organisations and companies. Most are issued for a fixed term (maturity) after which the issuer redeems them, usually at face value; during the term the issuer pays interest at a fixed rate, once, twice or four times a year. Investors can trade bonds in a secondary market, so they can invest or disinvest at any time.
In the United States the largest bond market is for government bonds, though there is also a large corporate bond market. In the United Kingdom there is a large market for government bonds and only a small one for corporate bonds.
The Nigerian market is similar: it is dominated by government bonds, mainly federal and some state bonds (several states have issued bonds), while corporate bonds are few and have been issued mainly by banks and a few large companies.
Governments, international organisations and very large companies also use the international bond markets, usually in dollars or euros, organised by international investment banks that advise issuers and sell the bonds to investors; Nigeria issued its first Eurobond in January 2011 ($500m) and another of $1bn in 2013.
Small companies cannot access the bond markets directly; foreign companies selling bonds in the dollar market need to be large and well established to persuade investors to buy.
Features of quoted government securities
- Issue price and nominal value: usually in units of ₦1,000 nominal, quoted as a percentage of that nominal value.
- Interest: each security has a coupon rate set at issue, fixed or variable. A fixed coupon is paid regularly, usually twice a year. A variable coupon may be linked to an index such as the Monetary Policy Rate, with a floor and a ceiling.
- Yield: the market rate of interest, which drives the price of fixed-interest securities: the higher the yield, the lower the price, and the reverse.
- Return: the interest received plus capital appreciation, as a percentage of the opening price.
- Redemption: repayment of the nominal amount on a stated date or within a period. Undated bonds are probably never repaid. State bonds have been supported by a standing payment order on the state’s statutory allocation.
Advantages of government bonds are security of capital and income (default is not expected) and liquidity, since a quoted security can be sold. The disadvantages are that the price fluctuates and that inflation erodes both the income and the capital value.
Bond price, yield and return
A bond’s price is the present value of its future interest and redemption payments, discounted at the market yield. Example: a ₦1,000 bond pays 10% (₦100 a year) for three years and is then redeemed at ₦1,000. At a yield of 10% the price is ₦1,000. If yields rise to 14% the price is 100 ÷ 1.14 + 100 ÷ 1.142 + 1,100 ÷ 1.143 = 87.72 + 76.95 + 742.47 = ₦907.14; at 18% it is ₦826.06.
The price falls as the yield rises, because the fixed payments are worth less when investors can earn more elsewhere.
For an undated bond the price is the interest divided by the yield. A ₦1,000 bond with a 12% coupon pays ₦120; if investors now require 16% the price is ₦120 ÷ 0.16 = ₦750. A buyer who pays ₦900, receives ₦120 of interest and sees the bond value rise to ₦930 earns an interest yield of 120 ÷ 900 = 13.3%, a capital gain yield of 30 ÷ 900 = 3.3% and a total annual return of 16.7%.
Technology and the financial markets
Technology is transforming financial markets and institutions. The use of new technology to improve and automate financial services, making them more accessible, efficient and cheaper, is called financial technology, or fintech. It includes online banking, cryptocurrency, blockchain, quick response (QR) codes and artificial intelligence. Its effect can be seen in:
- Payments: faster, secure and more convenient platforms, such as mobile wallets.
- Investing: less human intervention and lower cost, making investing accessible and affordable.
- Lending: online lending platforms that widen access to credit.
- Banking: account opening, transfers and bill payments online, improving the customer’s experience.
- Regulation: new questions for regulators on the safety, security and reliability of markets.
The benefits are cost efficiency (lower entry barriers for new firms and some services at little or no cost), collaboration and rapid innovation across the world, security through transparency and frequent audits, and a better customer experience through automation. The challenge is cyber-security, which forces institutions to keep updating their defences.
For example, a bank processes 5 million transactions a year at ₦150 each in branches, a cost of ₦750m. If 60% move online at ₦20 each, the cost is 3 million × ₦20 = ₦60m plus 2 million × ₦150 = ₦300m, a total of ₦360m, saving ₦390m; after spending ₦90m a year on cyber-security the net saving is ₦300m.
The ideas in more depth
Why the price moves against the yield
A bond’s cash flows are fixed. When the return that investors require rises, the same payments are worth less today, so the price falls until the return on the new price equals the market yield. The longer the time to maturity, the larger the fall, because more of the payments are further away and are discounted more heavily.
Why technology is both opportunity and risk for markets
Lower cost and wider access bring more participants and more liquidity; but the same systems concentrate risk in a few platforms, spread fraud quickly and move faster than regulators. Every benefit therefore comes with a control that must be paid for.
Sources and references
- The Debt Management Office for federal government bonds; the Securities and Exchange Commission and the Investments and Securities Act 2025 for the regulation of the market; bond issues are accounted for under International Financial Reporting Standard (IFRS) 9 Financial Instruments.
These points are stated as at 5 November 2026.
Worked examples
Example 1: an undated bond. A ₦1,000 undated bond pays 12%; the market yield is 16%. Required: the price.
- Interest. ₦120 a year.
- Price.
₦120 ÷ 0.16 = ₦750.
Example 2: a bond return. Bought at ₦900, interest ₦120, year-end value ₦930. Required: the return.
- Yields.
Interest 120 ÷ 900 = 13.3%
capital gain 30 ÷ 900 = 3.3%. - Return. 16.7%.
Example 3: a three-year bond. ₦1,000 nominal, 10% coupon, three years, yield 14%. Required: the price.
- Present values. 87.72 + 76.95 + 742.47.
- Price. ₦907.14.
How to answer in the exam
- Show the price and yield relationship with a calculation, not just a statement.
- Give both parts of a bond return: interest yield and capital gain yield.
- State the characteristics of government securities and their advantages and disadvantages.
- For technology, give a benefit and a risk for each of payments, investing, lending and banking.
Common mistakes in the exam
- Saying that a bond price rises when the yield rises.
- Forgetting the capital gain in a bond return.
- Using the coupon rate as the market yield.
- Describing technology without its risks.
- Calling government bonds free of all risk, forgetting inflation and price risk.
- Mixing nominal value and market price.
Quick revision
- Government bonds dominate the Nigerian market; Eurobonds are issued in dollars.
- Price = present value of interest and redemption at the yield; yield up, price down.
- Return = interest yield + capital gain yield.
- Fintech: payments, investing, lending, banking, regulation; cost and speed against cyber-risk.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. The Nigerian bond market is dominated by:
- Corporate bonds
- Bank bonds
- Government bonds
- Foreign bonds
Show the answer
C. Mainly federal and some state bonds.
Question 2. When the market yield rises, the price of a fixed-interest bond:
- Rises
- Falls
- Is unchanged
- Doubles
Show the answer
B. The fixed payments are worth less.
Question 3. The return on a bond is:
- Interest yield plus capital gain yield
- Interest yield only
- Capital gain only
- Face value
Show the answer
A. Both measured on the opening price.
Question 4. The price of an undated bond with interest of ₦90 and a yield of 15% is:
- ₦135
- ₦900
- ₦1,000
- ₦600
Show the answer
D. ₦90 ÷ 0.15.
Question 5. International bonds are usually issued in:
- Local currency only
- Major currencies such as dollars or euros
- Gold
- Shares
Show the answer
B. Organised by international investment banks.
Question 6. An advantage of government bonds is:
- Security of capital and income and liquidity
- Fixed price
- Protection from inflation
- No interest
Show the answer
A. Default is not expected.
Question 7. A disadvantage of government bonds is that:
- They cannot be sold
- They never pay interest
- Inflation erodes income and capital and prices fluctuate
- They are issued by banks
Show the answer
C. Price risk and inflation risk remain.
Question 8. A challenge of fintech is:
- Higher cost for all users
- Slower payments
- No new entrants
- Cyber-security
Show the answer
D. Institutions must keep updating defences.
Question 9. The coupon rate of a bond is:
- The market yield
- The share price
- The interest rate set at issue on the nominal value
- The tax rate
Show the answer
C. It may be fixed or variable.
Question 10. A benefit of fintech is:
- Lower entry barriers and cost efficiency
- Higher paper use
- Less access
- No regulation
Show the answer
A. Also faster innovation and better service.
Section B style: written questions
Question 11 (10 marks). (a) State FOUR features of government securities. (4 marks) (b) State TWO advantages and TWO disadvantages of government bonds. (4 marks) (c) State why a bond price falls when yields rise. (2 marks)
Question 12 (15 marks). A ₦1,000 undated bond pays a 9% coupon. (a) Calculate its price if investors require 15%. (3 marks) (b) An investor buys at ₦850, receives ₦90 of interest and sees the value rise to ₦880. Calculate the interest yield, capital gain yield and return. (6 marks) (c) Explain why the price falls when yields rise, and state TWO advantages and TWO disadvantages of government bonds. (6 marks)
A further written question
Question 13 (20 marks). A bank processes 5 million transactions a year at ₦150 each in branches. It expects 60% to move online at ₦20 each and will spend ₦90m a year on cyber-security.
(a) Calculate the cost before and after the move. (6 marks) (b) Calculate the saving and the net saving after cyber-security. (4 marks) (c) State THREE benefits of fintech for financial institutions. (6 marks) (d) State TWO risks and how they are managed. (4 marks)
Model answers
Show the model answer to Question 11
(a) Issue price and nominal value; coupon rate; yield; return; redemption (1 each, any four).
(b) Advantages: security of capital and income; liquidity. Disadvantages: price fluctuation; erosion by inflation (1 each).
(c) The fixed payments are worth less when investors require more, so the price falls until the return equals the market yield (2).
Show the model answer to Question 12
(a) ₦90 ÷ 0.15 = ₦600 (3).
(b) Interest yield 90 ÷ 850 = 10.6% (2); capital gain 30 ÷ 850 = 3.5% (2); return 14.1% (2).
(c) The fixed payments are worth less when investors require more (2). Advantages: security of capital and income; liquidity. Disadvantages: price fluctuations; erosion by inflation (1 each).
Show the model answer to Question 13
(a)
- Before.
5m × ₦150 = ₦750m (2). - After.
3m × ₦20 = ₦60m plus 2m × ₦150 = ₦300m, a total of ₦360m (4).
(b)
- Saving ₦750m − ₦360m = ₦390m (2)
- net ₦390m − ₦90m = ₦300m (2).
(c) (2 marks each, any three) Cost efficiency; faster, wider access to services; better customer experience; rapid innovation; more transparency and audit.
(d) Cyber-security risk, managed by continuous updating of defences and controls (2); regulatory risk, managed by engagement with regulators and compliance systems (2).
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