Looking For Low-risk Investment Options In Nigeria? T-Bills Is The Safe Bet

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Do you have a chunk of capital lying idle in the bank? Are you looking for some short-term low-risk opportunity to invest your capital and get good returns? Look no further, investing in Treasury bills is fail-safe, and not just that, it offers good returns too in a short span of time.

The meaning of Treasury bills (T-bills)

Treasury Bills (or T-Bills for short) are a short-term financial instrument that is issued by the state with maturity periods ranging from a few days up to 52 weeks (one year). They are considered among the safest investments since they are backed by the full faith and credit of the Government.

In more elaborate terms,

Treasury bills (T-bills) are (usually less than one year, typically three months) maturity promissory notes issued by the national (federal) government as the primary instrument for regulating money supply and raising funds through open market operations. Issued through the country’s central bank, T-bills generally do not pay any explicit interest but are sold at a discount, their return being the difference between the purchase price and the par-value (also called the redemption value).

When an investor buys a Treasury bill, they are lending money to the government. Various Governments use money raised from treasury bills to fund its debt, finance capital expenditure and pay for ongoing expenses such as salaries and military equipment.

In Nigeria, treasury bills are guaranteed debt instruments issued by the Central Bank Of Nigeria (CBN) for the financing of expenditure on their behalf. The CBN also makes use of treasury bills to control the economy’s money supply.

How T-Bills are sold

Treasury bills are sold through the CBN’s bi-weekly auction. Buyers are asked to quote bids after which the average minimum bid is selected.

How can one invest in treasury bills?

It is possible to buy Treasury Bills from any authorized dealer. Lately, banks have developed treasury bill mobile apps to make the process a lot easier. Sterling Bank’s i-invest is the most typical example.

What is the minimum amount that one can purchase?

In the past, an investor could purchase treasury bills for as low as N10,000 and subsequently in multiples of N1,000. It, however, was raised in 2017 to N50,000,001. However, this article will show you to invest in treasury bills even if you don’t have up the required 50 million.

For example, using the I-mobile application, the minimum amount to buy treasury bills is N100,000.

When are treasury bills sold?

As reported by the CBN, Treasury Bills are sold every other Wednesday (bi-weekly). The CBN publishes issuances on national dailies, websites and other media. You can also request that your bank account officer inform you of any issuance ahead of time.

If I want to buy T-bills, how do I go about it?

To purchase treasury bills, approach your bank and request for a form. Fill in the form with your personal information indicating the amount you would like to purchase as well as the price of your bid.

With the advent of mobile applications, the process has become less burdensome as you only need to fill out a signup form once.

T-bills bid rate

The bid rate otherwise referred to as your STOP RATE is the probable interest rate you have stated for the principal you are investing in the T-bills. For example, as your expected rate, you may denote an interest rate of 10 percent. Most likely, your bid rate will be different from that of other bidders.

How is the final bid rate selected?

The CBN selects the bids that fall below the accepted marginal rates. The marginal rate is the minimum average rate of bids submitted in a bid period. For example, if the marginal bid price opened on Monday November 4, is 9 percent, then bids falling below this rate will be accepted and bids above rejected.

If you cannot decide your bid rate

If you don’t have a stop rate or you’re not sure about a rate, you can choose the option to have the bank select a rate for you. This does not however guarantee that the bank rate selected is the best possible bid rate.

When your offer gets declined

It’s not the end of the road. You can also buy T-bills from the Over The Counter (OTC) secondary market through a broker. This is where T-bill’s buyers and sellers trade the bills for cash.

T-bills duration (tenor)

The Central Bank Of Nigeria Treasury bills are usually 91 days, 182 days, and 364 days. As such, depending on your choice, you can have the CBN keep your cash for 91 days, 182 days, or 364 days. The CBN, however, may decide to sell Treasury Bills for all or either of the tenors available.

Is it possible to sell before Maturity?

Yes Indeed, you can sell Treasury Bills before the end of tenor. This can be done through the OTC market, as mentioned above. The rate at which you sell depends on the forces of demand and supply.

For instance, a face value N100,000 TB may sell for less or more depending on buyers’ yield expectations. If your face value is trading at a higher price, it means you can sell your treasury bills at a profit as your N100,000 can sell for N100,500 or more. If your face value is trading at a lower price, it means you can sell your treasury bills at a loss, as such your N100, 000 face value can be sold for N99,500 or less.

When is the interest paid?

The interest component of a treasury bill is paid upfront and credited directly to your bank account. For instance, when you buy N100,000 worth of T-bills with a 10 percent interest rate, the CBN will debit your account with N90,000 as your N10,000 interest will be paid upfront. Upon maturity, the face value N100,000 will be charged. The upfront payment of your interest actually increases your true yield.

What’s a True yield?

True Yield is your Return On Investment (ROI) in percentage. Using the above example, the initial yield is 10% for the N100,000.

However, because you have received your interest in advance, your real yield is the N10,000 in interest divided by the N90,000 actually deducted from your account. That’s N10,000/N90,000 or 11.11%. It, however, is higher than the 10% coupon. The True Yield is fully earned when you hold on to maturity.

You can also roll over your investment

Although the CBN will not automatically roll over your investment. However, you can give your bank a mandate to transfer the principal on your treasury bill upon maturity. You can also take advantage of compounding interest by asking your bank to reinvest your TB’s share of interest once it is paid.

Treasury bills are safe to invest in

Treasury Bills are one of the safest forms of investment, backed by the full faith and credit of the Federal Government.

Apart from interest rates, T-bills have other advantages

1. A good source of steady revenue stream.

2. Treasury bills is a good place to invest your free and disposable money.

3. Investing in Treasury bills is a good method of saving money.

4. Treasury bills are tax-free as well.

5. Treasury bills are highly liquid and easily convertible to cash.

6. T-bills can be used as collateral.

7. Derivable interests from treasury bills are also not taxable.

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