For some, they might never forgive themselves if they lost their money.
I’ve got friends like that. And I think everyone has that one person in their circle.
Treasury bills aka T bills are for such people. Send them a link to this post already.
Here is a simple guide to investing in treasury bills in Nigeria.
Treasury bills in Nigeria
The central bank issues t bills on behalf of the federal government. It’s like government crowdfunding. The government raises “cheap money” from people like us to finance its expenses. The central bank also uses it as a tool to mop up extra cash in the economy.
T bills are low risk because the government guarantees it. So far you trust that the Nigerian government would be around a year from now, then you are good to go.
Now, the minimum investment according to the Nigerian central bank is 50 million naira. And it is often auctioned every other week. But some financial institutions who buy directly from the CBN are giving the right to sell to retail investors like you and me.
Some of these financial institutions who buy directly from the CBN have lowered the minimum investment to N 50, 000, N100, 000 and some a million naira. Of course, they charge us some fees for their services, which varies depending on the financial institution you use.
How do you buy treasury bills?
It’s easy — there are two common ways. Either use your bank or a stockbroking firm.
The least stressful way would be using an online stockbroking platform. You can register and complete the whole process from the comfort of your house/office. However, most stockbroking firms only allow a minimum investment of N100, 000.
For commercial banks, they have different investment thresholds. You should ask your own bank the minimum they allow.
After you have deposited money in your stockbroking account and requested for a specific maturity date – 30 days, 52 days, 182 days or 364 days – they would deduct the investment from your account and pay the upfront interest to your bank account.
Some days later, the stockbroking firm should also send you the certificate for your purchase.
How do you calculate your return on investment?
Let’s take an example.
I buy N1,000,000 worth of T bills from my bank or stockbroker at the rate of 13% that would mature in 364 days.
To calculate the upfront payment: Interest (I) = P x T x R / 100
P = Principal
T = Time/Duration
R = Rate
That is 1,000,000 x 1 x 13/100 = 130, 000. This is what I get paid at the beginning of the investment while N870,000 is remitted to the CBN.
Also means I’m really only investing N870, 000 and not N1,000, 000 since I’m already paid N130, 000.
To calculate my true yield then: R = I x 100/P x T
130,000 x 100/ (870, 000 x 1) = 14.9% is the true yield on the investment.
However, let’s say I want to do a shorter tenor. (Important: The shorter the maturity date, the lower the interest rate).
If you are trying to calculate for a 30 day, 91 day or 182 tenors, the Time (T) in the equation above becomes 30/365, 91/365 or 182/365 respectively.
Recent rates of treasury bills
According to data from Afrinvestor, as at May 27, 2019, below are interest rates for treasury bills and their tenor. Please note that this doesn’t indicate future rates (rates could go lower or higher at the next CBN auction).
|Tenor (days)||Rate (%) p.a.||Yield (%) p.a|
Advantages of treasury bills
- Treasury Bills are tax-free
- Guaranteed returns
- Interest is paid upfront
- Interest is paid upfront (you can reinvest your interest in another investment vehicle)
Disadvantages of treasury bills
- You can’t roll over your investments, which means you have to incur fees each time you bid.
- Returns are often only a little above inflation rate
Simple treasury bills terms to know
- Bid rate – The price you are willing to pay for treasury bills during the auction.
- Stop rate – The maximum interest rate issued by the CBN
- Primary market – The market where new treasury bill issues are bought
- Secondary market – This is where investors can buy and sell existing treasury bills
- Tenor – The number of days you have got to hold the treasury bills until you get back your money from the CBN. You can decide to sell your investment on the secondary market before the end of a tenor though.