Understand Investing in the Treasury Bills Market

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In the financial investment space, there are long-term investments such as stock markets, intermediate-term investments such as bonds, and short-term instruments such as Treasury bills.

Treasury bills are short-term debt instruments issued by a country’s federal government, through its central bank, to raise short-term funds from individuals, institutional investors, non-governmental organizations, religious bodies, and others to fund the government budget deficit.

When individual investors or corporations buy Treasury Bills, they are essentially lending money to the government. The Nigerian government uses the money to meet its obligations like funding its debts and to pay for ongoing expenses like salaries and military equipment.

Treasury Bills are issued by the Central Bank of Nigeria (CBN) and are guaranteed and secured with the full confidence of the Nigerian Federal Government. Because they are guaranteed, Treasury Bills are risk-free short-term investments.

T-Bills can be bought in either a primary or secondary market. In Nigeria, the CBN conducts T-Bills auctions on the primary market, typically every two weeks, and asks investors to indicate the rates they are willing to pay for the different maturities of T-Bills, typically 91 days, 182 days days and 364 days instruments.

At the auction, the highest price at which the CBN is willing to sell is called the stop price. Any investor trading below or at this price will receive the quoted amount and at the individual price, and any investor trading above the stop price will be bid out.

While the primary market takes place every two weeks, the secondary market allows T-Bills to be bought every other day. To buy T-Bills on the primary market, an investor must be willing to invest at least N50 million, while investors on the secondary market can invest at least N100,000.

How it works

Treasury bills are issued on the primary market for a fixed period of time, typically 91 days (3 months), 182 days (6 months), and 364 days (one year). Tariffs for T-Bills are quoted annually; As a result, an investor only gets the full rate if the term is up to 364 days.

For example, if the interest rate on a 182-day T-bill is quoted at 10 percent, the investor is effectively getting 5 percent. However, on the secondary market, T-Bills can be bought with irregular maturities ranging from 1 to 363 days.

Treasury bills are issued at an interest rate, often referred to as the discount rate. This is because the investor receives their interest upfront. This means that the interest promised on a T-Bill instrument is payable on the investment inception date.

For example, if a T-bill promises an interest rate of 10 percent per annum and an investor wants to invest N100,000, the investor will only pay N90,000 from the day of the investment but will get back N100,000 at maturity. The maturity value of N100,000 is called the face value while the initial investment of N90,000 is called the discount value.

Since the interest is paid upfront, the true return is actually the N10,000 interest received divided by the N90,000 actually paid. That’s N10,000/N90,000, which is 11.11 percent. However, this is higher than the rate of 10 percent per year. The true return is fully realized if investors hold to maturity.

The secondary market allows you to sell T-Bills before maturity. However, the price at which you sell depends on the prevailing interest rate. For example, an N100,000 face value (FV) T-Bill may sell for less or more depending on the prevailing interest rate at the time of sale, as expected returns affect interest rates.

If your FV is trading at a higher price, it means you can sell your T-Bills for a profit as your N100,000 can sell for N101,000 or more. If your FV is trading at a lower price, this means you can sell your T-Bills at a loss and therefore sell your N100,000 for N99,000 or less.

Advantages of investing in treasury bills

Treasury bills in Nigeria are guaranteed by the full confidence of the federal government; therefore there is no delay. In the event that the government cannot pay, the CBN can print money to settle all investors.

Investing in T-Bills encourages savings and can easily be converted into cash.

T-bills also pay higher interest rates than an investor will receive from a commercial bank, as well as the fact that T-bills certificates can be used as collateral for bank loans.

Its active secondary market also ensures that not only entry but also exit is facilitated.

Treasury bills offer investment opportunities not only to the big players in the investment world, but also to small and new payers in the debt instruments market

As with other types of debt securities, the price of T-Bills and the yield available to investors may be affected by various factors such as macroeconomic conditions, investor risk appetite, inflation, monetary policy and specific supply and demand conditions for T-Bills.

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