By Adaeze Okechukwu
Like individuals and companies, governments occasionally borrow to fund their operations. When government wants to borrow for less than one year, it does so by issuing Treasury Bills (T-Bills).
Hence, T-Bills are short-term debt instruments issued by a national government through the Central Bank to provide short term funding for the government. In addition to the above, central banks also use T-Bills to control money supply in the economy.
Unlike other government investment instruments such as Federal Government of Nigeria (FGN) Bonds which are long term in nature, T-Bills are relatively more liquid instruments that can be easily sold off and converted to cash if need be.
Because they are debt instruments used by the government, there is zero- risk involved in this type of investment.
T-Bills are usually issued for the tenure (duration) of 91days, 182days or 364 days. After the expiration of the tenor, your investment matures.
The interest rate also known as bid rate is not fixed but fluctuates based on demand and amount offered by the apex bank.
Investing in Treasury Bills
Investors looking for passive investment in the country can sit back and make their money work for them by investing in T-Bills. Treasury Bills can be bought through any authorised dealers (banks and discount houses). The authorized dealers will submit tender on behalf of their customers.
You can buy for as low as N10,000 and in multiples of N1,000 thereafter.
The CBN advertises T-Bills issuance in newspapers. You can also ask your bank account officer to notify you ahead of an issuance. According to CBN, T-Bills can be purchased both at the primary and secondary markets.
To buy Treasury Bills from the primary market, you will have to approach your bank requesting for a form. You fill the form with your personal information also indicating the amount you want to buy as well as your bid rate. The bid rate is the likely interest rate that you have indicated to receive for the principal that you are investing.
If you do not have a bid rate or are not sure of a rate, you can have your bank choose a rate for you. However, there is no guarantee that the bank rate chosen will be the best.
Conversely, if your bid/ request is rejected, you can purchase T-Bills from the secondary market Over The Counter (OTC) through a broker. This is also where buyers and sellers of T-Bills trade the notes in exchange for cash.
How is the interest paid?
If you buy T-bills worth of N500,000 at 10 per cent bid rate/interest rate, CBN will debit your account with N450,000, leaving a balance of N50,000.
This means that your interest of N50,000 has been paid to you upfront. When your investment matures, you are still paid your N500,000. This shows that you were actually paid N550,000 for your investment of N500,000
Can I sell my T-Bills before Maturity?
If you are in urgent need of the funds you invested, you may sell your T-bills before it matures, using the OTC market as earlier mentioned. Nonetheless, whether you will sell for more or less of your face value (amount listed on the T-Bills) depends on the forces of demand and supply. For example a N500,000 face value T-Bill maybe selling for less- N495,000 or more- N510,000. The amount you will sell the T-Bill depends on the yield expectations buyers have for the bill.
Can I rollover/re-invest my investment?
The CBN does not re-invest your investment automatically. However, you can give your bank a mandate to rollover the principal on your treasury bill upon maturity. You can also get the benefit of compounding interest by asking your bank to reinvest the interest portion of your T-Bills plus the principal once it is paid.
Benefits of treasury bills
Investing in T-Bills is risk free and repayment is guaranteed from the federal government at the end of maturity period.
Because they highly liquid instruments, they can be converted to quickly cash if necessary, hence making entry and exit in the investment easy (though sometimes at a cost).
It is worthy to note that Treasury bills enables you earn your interest upfront and the interests earned from T-Bills are tax-exempt, when juxtaposed with those of fixed deposits.
More importantly, T-Bills can be used as collateral for loan.