DEFINITION of 'Savings Account'

A savings account is an interest-bearing deposit account held at a bank or another financial

institution that provides a modest interest rate. The financial institutions may limit the number of
withdrawals you can make from your savings account each month. They also may charge fees
unless you maintain a certain average monthly balance in the account. In most cases, banks do
not provide checks with savings accounts.

BREAKING DOWN 'Savings Account'

Savings accounts generally are opened to keep money that you don't intend to use for daily or
regular expenses. Savings accounts differ from checking accounts, which allow you to write
checks and use electronic debit to access your funds. Also, savings accounts – unlike checking
accounts – typically have limits on the number of withdrawals or transactions you may make
each month.

What is a 'Checking Account'

A checking account is a deposit account held at a financial institution that allows withdrawals
and deposits. Also called demand accounts or transactional accounts, checking accounts are very
liquid and can be accessed using checks, automated teller machines and electronic debits, among
other methods. A checking account differs from other bank accounts in that it often allows for
numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both.

Breaking Down 'Checking Account'

Checking accounts can include commercial or business accounts, student accounts and joint
accounts, along with many other types of accounts that offer similar features.

A commercial checking account is used by businesses and is the property of the business. The
business’ officers and managers have signing authority on the account as authorized by the
business’ governing documents.

Some banks offer a special free checking account for college students that will remain free until
they graduate. A joint checking account is one where two or more people, usually marital
partners, are both able to write checks on the account.

In exchange for liquidity, checking accounts typically do not offer a high interest rate, but if held
at a chartered banking institution, funds are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $250,000 per individual depositor, per insured bank.

For accounts with large balances, however, banks often provide a service to “sweep” the
checking account. This involves withdrawing most of the excess cash in the account and
investing it in overnight interest-bearing funds. At the beginning of the next business day, the
funds are deposited back into the checking account along with the interest earned overnight.

What is a 'Treasury Bill - T-Bill'

A Treasury Bill (T-Bill) is a short-term debt obligation backed by the Treasury Department of
the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to
a maximum purchase of $5 million on noncompetitive bids. T-bills have various maturities and
are issued at a discount from par.

When an investor purchases a T-Bill, the U.S. government effectively writes investors an IOU.
They do not receive regular interest payments as with a coupon bond, but a T-Bill does include
interest, reflected in the amount it pays when it matures.

BREAKING DOWN 'Treasury Bill - T-Bill'

The U.S. government uses the funds raised from selling Treasury bills (T-Bills) to fund various
public projects, such as the construction of schools and highways. T-Bills can have maturities of
just a few days up to the maximum of 52 weeks, but common maturities are one month, three
months or six months. The longer the maturity date, the higher the interest rate that the T-Bill
will pay to the investor.

What is a 'Certificate Of Deposit - CD'

A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed
interest rate and can be issued in any denomination aside from minimum investment
requirements. A CD restricts access to the funds until the maturity date of the investment. CDs
are generally issued by commercial banks and are insured by the FDIC up to $250,000 per
individual.

BREAKING DOWN 'Certificate Of Deposit - CD'

A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts
holders from withdrawing funds on demand. A CD is typically issued electronically and may
automatically renew upon the maturity of the original CD. When the CD matures, the entire
amount of principal,as well as interest earned, is available for withdrawal.

Early Withdrawal Penalty

Although it is still possible to withdraw money from a CD prior to the maturity date, this action
will often incur a penalty. This penalty is referred to as an early withdrawal penalty, and the total
dollar amount depends on the length of the CD as well as the issuing institution. Typical early
withdrawal penalties are equal to an established amount of interest.
Example of a Certificate of Deposit
Assume an investor purchases a $10,000 CD with an interest rate of 2% compounded annually
and a term of two years. The CD comes with an early withdrawal penalty of three months of
interest. At year's end, the CD will have grown to $10,200 ($10,000 * 1.02). At the end of the
second year, the CD will have grown to $10,404 ($10,200 * 1.02). If the CD is liquidated before
the maturity date, an early withdrawal penalty of 3/12 the annual interest earned will be forfeit as
the redemption fee.

What is a 'Portfolio Investment'

A portfolio investment is a hands-off or passive investment of securities in a portfolio, and it is
made with the expectation of earning a return. This expected return is directly correlated with the
investment's expected risk. Portfolio investment is distinct from direct investment, which
involves taking a sizable stake in a target company and possibly being involved with its day-to-
day management.

BREAKING DOWN 'Portfolio Investment'

Portfolio investments can span a wide range of asset classes such as stocks, government bonds,
corporate bonds, Treasury bills, real estate investment trusts (REITs), exchange-traded funds
(ETFs), mutual funds and certificates of deposit. Portfolio investments can also include options,
derivatives such as warrants and futures, and physical investments such as commodities, real
estate, land and timber.

The composition of investments in a portfolio depends on a number of factors. Some of the most
important include the investor’s risk tolerance, investment horizon and amount invested. For a
young investor with limited funds, mutual funds or exchange-traded funds may be appropriate
portfolio investments. For a high net worth individual, portfolio investments may include stocks,
bonds, commodities and rental properties.

Portfolio investments for the largest institutional investors such as pension funds and sovereign
funds include a significant proportion of infrastructure assets like bridges and toll roads.
Portfolio investments for institutional investors generally need to have very long lives so that the
duration of their assets and liabilities match.

Bonds are fixed income instruments issued by entities to raise funds. The issuer of a bond
presents the bond as a promise to make available regular, fixed, income payments to the investor
or the buyer of the bond who is also the bondholder. These income payments are known as
coupons and bonds which pay coupons twice a year are known as semi-annual coupon bonds.
There are also bonds that make coupon payments annually, known as annual coupon bonds.
Bonds which make no coupon payments are called zero coupon bonds, or deep discount bonds.
In making a decision to buy a bond, investors should consider a number of factors such as the
tenure of the bond, the coupon payments expressed as a single percentage rate, and the yield-to-
maturity or just simply, yield.
The Nigerian Stock Exchange (NSE) hosts and lists different fixed income instruments on its
platform which include:

 Federal Government Bonds - are the most liquid and capitalized bonds on the NSE. The Federal
Government (FGN) issues bonds in the primary market through the Debt Management Office (DMO)
at its monthly auctions and these bonds are subsequently listed on the Exchange for trading. These
bonds are backed by the full faith and credit of the Federal Government of Nigeria and are semi-
annual, coupon-paying bonds. Income earned on FGN Bonds is tax-free.

 FGN Savings Bonds - are a new initiative launched by the DMO in partnership with the NSE to give retail
investors an opportunity to contribute to the growth and development of the nation. The FGN Savings
Bonds are currently issued for 2-yr and 3-yr tenures and pay coupons quarterly. They are tax-free and are
backed by the full faith and credit of the Federal Government.

 State/Local Government Bonds - are regarded as Sub-National Bonds and are issued by State or Local
Governments usually to raise capital to fund projects in the state or municipality. Like FGN Bonds, these
bonds are semi-annual coupon paying bonds and are backed by the State or Local Government issuing the
bonds.

 Supranational Bonds - are issued by supranational entities which are formed when two or more sovereign
nations with aligned interests unite to pursue a common agenda most often to promote economic
development in developing or member economies. These entities often transcend geographical boundaries,
and have access to deeper pools of capital than would be available in the domestic market. They may issue
bonds in the local currency of the domestic economy or may issue Eurobonds which are essentially bonds
issued outside a country whose currency the bond is stated in. Supranational institutions sell their bonds on
local markets of member countries and in the Eurobond market.

 Corporate Bonds - are issued by private and/or public companies. They usually have higher interest rates
or yields than Government Bonds and are backed by the corporate entity issuing the bond.

 Eurobonds - are essentially bonds that are issued outside of a country in which the currency of that bond is
denominated. In modern times, Eurobonds have become synonymous with bonds issued in the international
market and denominated in USD. Sovereigns, Corporates, and Supranational institutions may choose to
issue Eurobonds to diversify their funding mix.