Treasury Bills or T-Bills are what you could call a Loan from you to the Federal Government or its agent – The Central Bank.
What that mean is on a periodic basis, the Central Bank borrows from the Public, and willing investors lend to it. Just like a typical Creditor-Debtor transaction, the creditor keeps his funds with the debtor and earns interest for the time value of his funds.
Its as simple as that.
Remember this post is part of a series of Investment Objectives. You could read more on the other options here.
The Basic Facts about Treasury Bills
T-Bills are short-term in nature, ranging from 90 days to approximately 1 year.
They are issued by the Central Bank and can be bought via authorised Discount Houses, Brokers or Bank.
The rates are attractive but not fixed, usually they are determined by a Bid process.
They are safe and guaranteed by the Federal Government so you shouldn’t bother about loosing your investment.
How do you buy a T-Bill
Approach a Bank or authorised Financial Broker indicating your interest in purchasing a Treasury Bill. You must ensure your account is funded. Minimum amount amount is 50 million[Wait! read on you could still purchase at a very much lower amount]
Tenor on T-Bills:
As mentioned earlier, T-Bills are short term securities not exceeding a year. Defined tenors are mainly 91, 182 and 364 days. Your funds are held for this periods depending on which option you purchased under.
Rates and Returns on Treasury Bills
This is the juicy part and what makes T-Bills rock. You get to earn your interest upfront. Let me explain. If you decide to invest N100,000 in a T-bill at 10% rate. You get N10,000 upfront or I’d rather say only the sum of N90,000 is invested and the rest stays with you. At maturity you get N100,000 back. – One more thing, there is the effective rate.
Effective rate on T-Bills
This relates to T-Bills less than 364 days. Have in mind that your the rate on T-Bills are pro-rated. How? If you invested N100,000 as per our example above for 182 days at 10%. You earn interest of 10% on that sum divided by 2. The interest rate is per-annum or yearly. So your effective rate is 5% flat or actual return is N5,000.
Can you request for funds from a T-Bill before the tenor elapses
Yes you can; however not directly form the CBN. there is this place called the Primary and Secondary market. You purchase Treasury Bills from the Central Bank of Nigeria at the Primary market. Now you also have the option of selling it for quick cash to someone else, this time around at the Secondary market. Your Bank or Finance intermediary still are your best go-to-meet on this. Remember when you sell at the secondary market depending on market forces, you may incur losses on your Investment income.
I don’t have the minimum amount of N50 Million to invest in a Treasury bill
Yes, the CBN is not shutting you out actually, they simply want to transact with fewer heads. The brokers and intermediaries have a work-around. They do it Votron style. It’s actually called Pooling. So whenever the CBN auction is out, the Banks collate funds from a pool of smaller investors and invest still at the Primary market, they may charge you a small fee for this though.
A very important thing to note about Savings:
Treasury Bills are very lucrative and safe, however you don’t just pick your funds because they are idle at the very moment and invest, only to realise some days after that you need the funds badly. Many have fallen into the Savings trap of keeping funds in an Investment plan at moderate interest but ended borrowing same amount from a lender at a ridiculous interest rate. Why save when you end up borrowing it again at a loss.
Remember your first step to Financial Ingenuity is proper planning and BookKeeping, there are investment options that might take cognisance of your future needs for cash. Keep reading on this series and I will share them with you.
Any other FAQs
I’ll be glad to have it in the comments below.