INVESTMENT OF PENSION FUNDS IN NIGERIAN BOND MARKET

ABSTRACT

Since the Defined Contributory scheme was introduced to replace the Define Benefit scheme in Nigeria, the pension assets in Nigeria has increased annually. The resultant effect of the increase of pension funds implies more responsibility for the Pension fund administrators to shoulder. Pension fund administrators regulated by the National Pension Commission were established to handle the investment of pension assets. The Nigerian bond market is an avenue for the investment of pension fund assets. Before pension funds are invested in a bond portfolio, proper pricing and measurement of risk must be carried out by Pension fund administrators to reduce the risk of losses. The study used Judgemental sampling in the secondary data obtained from FMDQ website and the Central Bank website. The data was analyzed using the basic, premium, base amount, makeham, duration and convexity formulas. The result of the analysis shows how the price of bonds changes with change in interest rate and shows how change in duration affects interest rate risk. It was shown in this study how Pension fund administrators value bonds, measure interest rate risk and measure the performance of bonds. This study recommends that Pension fund administrators price bonds using any of the pricing formulas used in the analysis of the bonds and measurement of performance of bonds should be done continuously by Pension fund administrators. 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

TITLE PAGE.. I

CERTIFICATION.. II

DEDICATION.. III

ACKNOWLEDGEMENT.. IV

ABSTRACT.. V

INTRODUCTION.. 1

1.0   BACKGROUND OF STUDY.. 1

1.1   STATEMENT OF THE PROBLEM... 4

1.2   AIM AND OBJECTIVE OF THE STUDY.. 6

1.3   RESEARCH QUESTIONS. 7

1.4   SIGNIFICANCE OF THE STUDY.. 7

1.5   SCOPE AND DELIMINATION OF THE STUDY.. 8

LITERATURE REVIEW... 9

2.0.0   PREAMBLE.. 9

2.1.0   THEORETICAL FRAMEWORK OF THE STUDY.. 9

2.1.1   Pure Expectations Theory.. 9

2.1.2   Liquidity Premium Theory (LPT). 11

2.1.3   Market Segmentation Theory (MST). 12

2.1.4   Preferred Habitat Theory (PHT). 13

2.2.0   CONCEPTUAL FRAMEWORK.. 16

2.2.1   Bond Pricing.. 18

2.2.2   Management of interest rate risk.. 19

2.2.3   Measurement of investment performance.. 22

2.3.0   EMPERICAL REVIEW OF LITERATURE.. 26

RESEARCH METHODOLOGY.. 30

3.0   PREAMBLE.. 30

3.1   RESEARCH DESIGN.. 30

3.2   POPULATION OF STUDY.. 31

3.3   SAMPLING TECHNIQUES. 32

3.3.1   BOND PRICING.. 32

3.3.2   Yield to maturity.. 34

3.3.3   DURATION AND CONVEXITY.. 34

3.4   LIMITATION OF THE METHODOLOGY.. 35

PRESENTATION AND ANALYSIS OF DATA.. 37

4.0   PREAMBLE.. 37

4.1   PRESENTATION AND ANALYSIS OF DATA.. 37

4.1.1   BOND PRICING.. 41

4.1.2   YIELD TO MATURITY.. 43

4.1.3   DURATION AND CONVEXITY.. 47

4.2   SUMMARY OF FINDINGS. 49

SUMMARY, CONCLUSION AND RECOMMENDATION.. 51

5.0   PREAMBLE.. 51

5.1   SUMMARY.. 51

5.2   CONCLUSION.. 52

5.3   RECOMMENDATION.. 53

5.3.1   RECOMMENDATION FOR FUTURE STUDIES. 53

BIBLIOGRAPHY.. 54