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How to invest in Treasury Bills (2)

By Babajide Komolafe

In the last edition, it was stated that anybody that wants to buy treasury bills (TBs) must go through the banks. To buy or invest in TBs, you have to visit your bank and inquire about the process.

economyIn most cases, you will be asked to bid, by writing a letter instructing your bank to bid for TBs on your behalf.  In the letter, you have to specify the amount you want to invest, and the interest rate you want quote (your bid rate).

Bearing in mind that your bid may not be successful if your bid rate is too high, it is advisable to instruct your bank to bid for you at the prevailing interest rate. While you are bidding, you may also wish to instruct your bank to roll over the investment until you instruct them to liquidate it.

In other words, when the TBs mature, the bank should use the money to buy TBs again. Now if you don’t give this instruction, the bank would simply credit your account with your money once the TBs mature, and you would have to write afresh for the bank to roll over the investment.

Before you invest in TBs, you must be certain that you would not need that money during the period of investment. In other words before buying TBs of 91 days maturity, you have to be sure you would not need the money within those 90 days. This is because it is costly liquidating investment in TBs before maturity. Why

The interest on TBs is usually paid up-front. If you invest N100, 000 in TBs of 91 days at 10 percent,   The CBN would pay you the interest immediately you make the investment. Hence at maturity, the CBN would return the principal to you i.e. N100, 000. But if you decide to liquidate the investment before the end of the 91 days, you will have to pay back the interest you have being paid and with additional money, which is like penalty of terminating the investment before maturity. Hence, it is advisable to be sure you would not need the money within the 91 days before you invest it.

Another aspect critical to investing in TBs, which is common to fixing money in bank deposit is the calculation of the interest to be paid on the investment. In the example given above, the interest rate (10 percent per annum of N100, 000) is N10, 000. But the N10, 000 is per annum i.e. for one year. To get the interest for 91 days, the N10, 000 is divided into 365 days, resulting to N27.40 for each day.

This is then multiplied by 91 days to get the interest for 91 days i.e. N2, 493. It definitely looks small. However, if you roll over the money for one year, you have something around N10, 000. And it is risk free. You are sure that you will get your money back. It is also still better that leaving your money in a Savings Account, which presently attracts about four percent interest rate.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.