Treasury Bills are financial instruments issued by the government when in need of money for a short period. It has a tenor ranging from 91 to 364 days and is always issued at a discount. The treasury bills in Nigeria are also used as a method of controlling money supply in the economy by CBN.
The CBN usually conducts an auction every fortnight where these treasury bills are sold. Investors are then requested to quote the rates they are willing to pay for different tenors ranging from 91-day to 182-day or 364-day. The CBN chooses the investors that quote at or below the STOP RATE, which is the maximum rate they are willing to sell.
Where to buy Treasury Bills and the Minimum Amount You can Buy
There are various official dealers/Agents/Banks that one can buy Treasury Bills from. Buying via Banks’ Treasury Bill mobile application is the easiest way these days. The Sterling Bank’s mobile application, i-invest is a typical example.
The Federal government has increased the price of Treasury Bills from N10, 000 to a minimum of N50,000,000, This simply means that retail investors would not be able to participate in the primary market for treasury bills any longer. However, there is a way to buy treasury bills even if you do not have up to N50 million. I-invest mobile application can only take a minimum of N100, 000 though.
When Treasury Bills are usually sold:
The Central Bank usually put out announcements for the issuance on its websites and on the pages of national newspapers in the country. Treasury bills are sold on a bi-weekly (every other Wednesday) basis. Your bank can also notify you ahead of time through your bank account officer.
How to Buy Treasury Bills:
You can purchase Treasury Bills by approaching your bank and requesting a form. Fill the form with the required information and state the amount you want to purchase as well as your bid rate.
Though treasure bills are normally issued on paper bills, now they are being issued in electronic form. Buying from a mobile application is easier since all you have to do is fill a sign-up form once, online.
Treasury Bills Bid Rate in Nigeria:
The bid rate is also known as your STOP RATE and this is the interest rate you want to receive on the principal you are investing in the Treasury Bill. Having an interest rate of 10% means you would be expecting a 10% profit of your initial capital at the end of the day. Bid rates varies for each investor
Modalities for Selecting Treasury Bills Bid Rate:
The CBN chooses the investors that bid at or below the stop rate, which is the maximum rate they are willing to sell. The minimum average rate for bids is called the Marginal rate. If the marginal rate for a bid opened Wednesday 26 August is 12%, any bid that falls below this rate gets accepted and those that are above it get rejected.
What To Do If You don’t have a Bid rate:
Not having a bid rate is not a setback. If you are not sure or don’t even know a rate to choose, you can have your bank choose a bid rate for you. With this however, there is no guarantee that your bank will choose the best rate for you.
If Your Bid is rejected…
Buying Over The Counter (OTC) is also an option for those who still want to purchase treasury bills after their bid rate is rejected.
Durations (tenor) For the Treasury bills (TB’s):
Treasury bills are issued for a time period ranging from 91 days to a year. The Central Bank of Nigeria will hold your cash for the period you choose and you get return on your investment when due. Since the rates on the treasure bill is quoted annually, you only get a full rate if your tenor is up to 364-day
Selling Treasury Bills before Maturity:
Yes, it is possible to sell your Treasury Bills before it matures. Though this can be done only through the Over The Counter (OTC) market. The price at which you sell is dependent on the prevailing interest rate. For instance, buying a treasury bill at N100, 000 Face Value (FV), you can sell for more or less depending on the prevailing interest rate. If it (i.e. your FV) is trading at higher price, you can be sure of selling at a price of N101, 000 or more. On the contrary, If the trading price is low, you will sell your treasury bills at a loss, i.e. the N100, 000 can sell for N99, 000 or less.
Payment of Interest on Treasury Bills:
Interest on Treasury Bill is paid upfront and into your bank account. For instance, say you purchase a Treasure Bill worth N100,000 that has an interest rate of 10%, a debit of N90,000 will be made to your account, thereby an interest of N10,000 is paid up-front.
Treasury Bills True Yield:
The effective Return on Investment (ROI) is known as True Yield. From the example above, the yield for the N100,000 is 10%, this is called the initial yield. However, because your interest is paid up-front, the true yield is then the N10,000 interest received divided by N90,000 that was debited from your account. Solving out the maths, that is N10,000/N90,000 which translates to 11.11%. This new interest rate is higher than the 10% rate per annum. You only get the True Yield if you hold your investment until maturity.
Rolling Over Investment
Yes, it is possible to roll over your investment, though the Central Bank of Nigeria (CBN) does not do this automatically for you. What you need to do is inform your bank of the wish to rollover the principal on your treasury bill upon maturity. You can also consider reinvesting your interest with your principal sum once the interest is paid. This will give you the benefit of compounding interest.
Safety of Treasury Bills Safe:
Treasury bills are very safe form of investment. They are absolutely risk-free and are backed by the Federal Government of Nigeria.
Other Benefits beside the Interest Rates:
- The fear of risk is eliminated since this investment carries the guarantee of the Federal Government
- It is a great source of steady income.
- Treasury Bills are good investments plan for people looking to save.
- It is a form of Investment that is absolutely tax-free.
- Treasury Bills can be converted to cash quickly due to their high liquidity.
- Treasury Bills are highly liquid instruments. Therefore, they can be used as collateral.
Taxation on Treasury Bills:
The interests made from Treasury Bills are not taxable.
This article illustrated how to invest in Nigerian Treasury Bills market. It is a basic guide to investing in treasury bills for beginners and gives a concise explanation of what treasury bills are and how to invest in it. It provided useful tips on how and when interest is earned and paid to an investor in treasury bills in Nigeria. Finally, it outlined the benefits of investing in treasury bills in Nigeria.