Fractional Bonds

What are Fractional Bonds?

A fractional bond is a self-established term for a fraction of a bond. Other commonly used terms are sub-nominal or retail size.

It is best to explain this with an example. At present all Nigerian Eurobonds trade with a minimum nominal volume of $200,000, with Nigeria's Diaspora Bond as the exception (Visit Types Section for more information on the Diaspora Bond. There is a $1,000 increment thereafter. This means that a dealer will only quote prices for a nominal size of $200,000 or more.

Ignoring accrued interest, an investor purchasing a Eurobond a 101.00% will need to have at least $202,000 in cash. The opposite, a discounted cash price of 90.00%, would mean the investor would only need $190,000 in cash to purchase $200,000 in nominal value.

The majority of (retail) investors cannot afford such purchases. Ideally, Eurobonds should be purchased in bite-sized volumes such as $5,000, $10,000 or $50,000. These nominal sizes below the set minimum nominal value threshold are known as "fractional" or "sub-nominal" sizes.

Who sets the minimum nominal amount for a Eurobond?

When a Eurobond is issued, the issuer decides the minimum nominal threshold. Bookrunners helping the issuer will provide advise too.

Why is there a minimum nominal amount?

It is widely believed that a higher threshold will exclude retail investors from buying and selling the Eurobond. From a regulatory perspective, it is prudent to educate retail investors with the risk they are taking when buying a Eurobond. Retail investors are known to create "noise"in the market with panic firesales or herd purchases at times. This will not benefit the liquidity in the secondary market.

Bookrunners will also have a say, as they function as the advisor to the issuer.

How do Fractional Bonds trade?

When Eurobonds are issued, a minimum nominal amount is set. At present, $200,000 nominal is the threshold for all Nigerian Eurobonds with a $1,000 increment thereafter. There is one exception, which is Nigeria’s June 2022 Diaspora bond which has a nominal minimum of $2,000.

Nominal trading sizes below $200,000 are possible, either through the purchase of a structured note or a so-called “buy/sell-back” process. The latter is more common and largely depends on dealer willingness and inventory position.

Nominal trading sizes below the set minimum as commonly referred to as “fractional” or “sub-nominal” trading sizes. An example is provided below.

Say an investor wishes to purchase $100k nominal of the 2025 Republic of Nigeria Eurobond. This Eurobond has a $200k minimum and therefore every trade needs to be $200k or more in order to be executed and settled. In this case, the investor can purchase $300k and simultaneously sell back $200k in order to end up with the desired $100k. 

Fractional trades do not happen often and are the discretion of the dealer to execute.