1. Introduction
Capital markets are marketplaces for interchanging of long-term financial securities. These securities include ordinary stocks, long term debt securities, such as debentures, loose debt stock, and translatable bonds. Capital market is where investors and potential investors have the opportunity to find viable securities that meet their investment needs. That is, buyers and sellers of securities meet at the capital market for exchange. According to Reference [
1], capital market in Nigeria affords a podium that helps to market administration stocks and other securities, such as commitment instrument or bonds, equities, and exchange trust fund. Government bonds and other public sector financial instruments in Nigeria marketed in the capital market include sovereign bond, municipal bond, corporate bonds, and government agency bonds [
2]. Issuance of government bonds is a borrowing technique the Government employs to fund developmental projects that stimulate economic expansion [
3]. Thus, the capital market is the only place the Government can access the lenders who are willing to lend to the Government by exchanging their money with government bonds and securities. However, certain macroeconomic factors, such as the GDP, inflation, interest rate, and exchange rate, determine a capital market progression [
1] to a considerable degree. However, an innovative role of a regime bonds in capital market growth is yet to receive sufficient empirical assessment.
A bond is a type of debt instrument that affords the debtor the opportunity of acquiring external resources to fund longstanding projects [
4]. Debt Management Office (DMO) Nigeria [
2] defines bond as a contract of debt whereby investors loan money to a borrower, typically the Government or corporate firms. The financier or holder of the bond is the moneylender. When an individual acquires a bond, the person lends money to the issuer, a Government, and, otherwise, a Company. The Government includes the Federal and State Governments, Local Government Council, and Government Agencies. The Government applies the funds emanating from the bond issuance to correct budget shortfalls or finance capital projects to improve the economy and its technology. On the other hand, the company also uses the bond proceeds to expand their firm’s business.
Chen and Mansa [
5] postulate that government bonds are loan instruments supplied via a regime to provide backing for the administration expenditure plus commitments. Regime bonds are low-risk investments but debt-based. These types of debt security are associated with periodic payments of interests referred to as coupon payments [
5]. The issuer pays the coupon (referred to as the specified rate of interest) and the principal at maturity [
2]. The Government uses them to raise funds for infrastructural and technological provisions. The holders or investors receive common interests as their returns. The practical understanding of government bond is necessary. It follows that an investor has lent to the Government as soon as he purchases government bond. That means the Government has borrowed, from the lender, an agreed amount of money for an agreed period [
6]. As a fixed-income asset, the Government reciprocates by regularly paying a definite periodic amount of interest known as the coupon [
6]. The maturity date is the day the bond expires, and the bondholder gets back the original investment from the Government. The maturity date of bonds varies, sometimes one year, six months, and even as long as ten years or more.
Bond is significantly different from stocks. The critical dissimilarity between stocks and bonds is that shares symbolize interest right in the allotting entity. In contrast, bonds are a kind of obligation in which the issuer undertakes to reimburse the principal sum at a particular date [
2]. One more significant distinction is that dividends are usually paid to shareholders when the issuer announces earnings. As for bonds investment, the bondholders are entitled to periodic interest payment by the issuers and reimbursement of the principal at the maturity date [
2]. The FGN bond operations are synchronized by the DMO, Central Bank of Nigeria (CBN), The Nigerian Stock Exchange (NSE), Financial Market Dealers Quotation (FMDQ) OTC PLC, Central Securities Clearing Systems Ltd. (CSCS), and Securities and Exchange Commission (SEC) [
2].
The role of government bonds in promoting the capital market in Nigeria cannot be underestimated. It is a topical issue that has ignited so much debate among economists, finance analysts, researchers and development specialists. Notwithstanding the sensitivity of this subject matter, there is still a scarcity of empirical works corroborating government bonds’ efficacy in expanding the capital market in Nigeria. This study helps to bridge the gap by providing empirical evidence on government bonds’ impact on capital market development in Nigeria. The present study is invariably assessing the four major components of government bonds in Nigeria and the level of innovation they have caused in the capital market evolution. The previous studies reviewed in this work failed to capture this specific area. Apart from Reference [
7], local empirical studies are absolutely paucity in this research region. However, future researchers will find this present study useful and sufficient for a more enriched literature review.
The structure of this paper includes five sections. The first section is the introduction, which takes care of the study background, problems, and motivation for the study. The next section provides comprehensive literature review which comprises the theories underpinning this study and the related empirical works. We have the research approach, design, and data collection technique under
Section 3. In
Section 4, the study provides a detailed analysis of the data captured for this study, while the
Section 5 gives the summary, suggestions, and concluding statements based on the findings of this study.
5. Summary and Suggestions Averse
The study examines the impact of management bonds on money market evolution in Nigeria from 2003–2019. The dependent variable we employ is the total market capitalization. In contrast, the independent variables are the government bonds: FGN bonds, treasury bonds, bonds/debts and inflation rate to moderate the variables. The findings show that FGN bonds are significant and favorable to the growth of the capital market in Nigeria. On the contrast, the other predictor variables are found insignificant in affecting the capital market growth. The policy implication is that government bonds are an integral part of the Nigerian capital market and is anticipated to affect change. They are also marketable and risk-free securities. The returns may not be very high, but there is no room for default as the interests are paid when due. This characteristic of the government bond is very paramount and will help to boost the growth of the capital market in the country.
Therefore, investors are encouraged to leverage the numerous benefits of government bonds. The study suggests that the capital market should provide the best platform to make government bonds more attractive to investors. Government bonds, included in an investor’s investment portfolio, have been found the lowest in producing returns although stable. Based on this premise, this study further recommends that the Government improve the rate of returns on government bonds. The quality of returns should be made fascinating, while still upholding the ‘no default ethics’ in interest and principal reimbursement to investors at maturity.
This study suffers a dearth of empirical works of literature in this area of research. As a result, this study recommends that future researchers should conduct more local studies to assess government bonds’ impact on the growth of the capital market in the emerging nations, including Nigeria. Further studies should also consider the effect of other financial instruments the Government uses to source for the capital market fund. There is a need to assess government bonds’ contribution to the capital market at different times and intervals using various econometric tools to enable comparison of results.