Treasury bills are safest bonds around the world that assures the one who wishes to invest a risk- free investment.
In Nigeria for instance, anyone who wishes to set aside some money and earn a significant return can opt for Treasury bills to make extra cash. Being popular among business-oriented minds has made many seize the opportunity to make extra money.
About Treasury Bills
Treasury Bills are short term bonds issued by the Federal Government through Central Bank of Nigeria to meet short term funding for the government. Banks, Trust, institutions, firms and even individuals can purchase these particular bonds. The Central Bank of Nigeria issues the bonds periods for 91 days, 182 days and 364 days at a Primary market auction and investors come to place their bids to buy them.
Treasury Bills and The Government
Governments around the world use Treasury bills to raise or control money within their economies depending on the objectives of the control measures the government is adopting at any given time. Investors who understand how Treasury bills work tend to take advantage of such bonds to make money. Therefore, it is very important you know what Treasury bills are and how to key in so you can possibly invest in Treasury bills.
How is Treasury Bills a Good Investment?
Before an investor makes any investment, the investor must first determine through feasibility study, whether the available investment opportunity is viable and then make a decision based on the findings. What are the advantages of investing in Treasury bills?
- These short term bonds are very liquid, that is, can be converted to cash quickly.
- Interest earned is exempted from taxation.
- The Investment is risk-free because of the guarantee of the Federal Government
- Investors can use it as collateral when applying for loans in banks
- Interest in Treasury Bills is paid upfront
- Returns are most often than not, a little above the inflation rate
- Investors cannot roll over investment. They have to incur a cost each time they make a bid.
How to Buy Treasury Bills in Nigeria
Treasury Bills can be purchased either in Primary or Secondary markets. The Primary market is when the investor buys directly from the CBN through a public auction carried out every fortnight, while in the Secondary market, an investor buys Treasury bill from an existing holder of the Treasury bill and this could be a bank or stockbroker.
Hence, Treasury bill in Primary market can be bought every two weeks while in the Secondary market, it can be bought every other day. The minimum amount that can be bought in Primary market is >N50.0m.
while in the Secondary market, Banks and other financial institutions usually hold Treasury bills. There are two ways of investing in this opportunity as a secondary market.
An investor could decide to buy Treasury bills in Nigeria banks or get it through stockbrokers. Investment via banks is simple and the most reliable. The investor needs to get in touch with the bank and they will be put through. However, the bank determines the minimum bond you can buy. Whereas some offer N50,000 as a minimum, others go as high as N500,000. It all still varies for alternative routes.
How to calculate Treasury Bills
Federal government issues Treasury bills at discount prices and upon maturity, the government repurchases then at a full quotation. Example, an investor buys a N300,000 Treasury Bill at a discounted rate of N200,000 for 364 days. After the purchase, the Federal Government writes a IOU (I Owe You) of N300,000 and pledges to pay after 364 days. Upon expiry of the set timeline, the government buys back at a full price. The interest rates for these bonds are not fixed. The Central Bank and the demand for Treasury Bills determine the stop rate.
Suppose you buy a 364-day Treasury Bill worth N300,000 from a stockbroker or your Bank at an Interest rate of 15% . You can calculate the upfront payment using the formula:
Interest = Principal x Time x Rate/100
Principal = N300,000
Time = 364 days (equivalent to 1 year)
Rate = 15/100
N300,000 x 1 x 15/100 = N45,000.
This, therefore, means that you will get paid N45,000 at the start of your investment and the remaining N255,000 is remitted to the Central Bank of Nigeria.
The figures above should tell you that your investment is N255,000 and not N300,000 because you get N45,000 back.
To determine the actual rate of return:
Rate = (Interest x 100)/ (Principal x Time)
Rate = (45,000 x 100) / (255,000 x 1) = 17.6%
Treasury Bills Auction
Treasury Bills are issued for a specific time referred to as tenor. In Nigeria, three tenors are used. An investor could invest for 91 days, 182 days or 364 days. The auction exercise takes place every two weeks and open to willing investors.
The interest rate, also called stop rate, is the bid rate you will receive for the money you wish to invest. For instance; an investor may expect a rate of 15%, this rate could be different from those of others who wants to buy the same bond.
How then is the bid rate determined?
The Central Bank of Nigeria selects bids below the Marginal Rate – that is the minimum average rate of submissions made within that particular bid window. If the marginal rate is 11%, then all submitted bid below it are accepted.
In conclusion, investing in Treasury bills in Nigeria is a simple great opportunity which anyone who wishes to go into should familiarize himself or herself with basic aspects of the business.
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