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Treasury Bills: What you need to know about Treasury Bills

What exactly are Treasury bills?
Where can i buy Treasury bills?
How can i buy Treasury bills?
What’s the minimum amount of money required to invest in Treasury bills?
How exactly is my return calculated?

I think that’s really big question for most people but i will try and do justice to some of the questions.

What exactly are Treasury bills. Treasury bills are governments traded securities. In a very simple terms think about it this way.The Government has expenditure just as you do and when the Government needs money to embark on some projects, they can come to individuals like you and me to borrow money of which they will repay after some defined time with interest. You will be wondering how the Government will come to you to borrow them money. They come to you through the Central Bank of Nigeria (CBN).

Its like the Government are asking you; can you borrow us money? We will pay back after some defined time which they will specify. That is what exactly Treasury bills are. Treasury bills are basically securities through which the Government comes to raise money to meet the expenditures and the CBN also uses it as a tool to manage money supply in the economy. So, if they think that there’s too much money in the economy they say, oh you people have too much money. Let’s go and take some money out of the economy. They come and give you Treasury bills, so, that way you buy Treasury bills, they take some money from you. In a very simple terms, that exactly what Treasury bills are.

Where or how can you purchase treasury bills? Treasury bills are usually issued by the central banking authority in Nigeria which is the Central Bank of Nigeria (CBN). Find out what the central banking authoritiy is in your country but in Nigeria it is called Central Bank of Nigeria or CBN. They are resposible in the issuance of treasury bills in what is known as a primary market. They do that like every two weeks, like auctions where banks and financial institutions come to beat for Treasury bills and sometimes they do like an open market operation which is a special case when they need to monitor or reduce the money supply in the economy but most of the time they do it every two weeks. They come and issue Treasury bills and banks and financial institutions come to buy.

So, that’s what happens in the primary market but there’s also a secondary market. The CBN issues the bills in the primary market that’s where banks and financial institutions buy but you know sometimes they want to trade so they offer to sell it to you or somebody who bought before wants to sell to another person so that’s what happens in the secondary market. Secondary market is where people that have bought before trade with one another. Think about it as a form of exchange for people that want to trade their treasury bills. This could be one of the reasons why they say Treasury Bill is one of the most liquid investment options because you can easily sell it even before maturity. Treasury bills have different lengths of maturity, you have the 91 day Treasury bill, 182 day Treasury bill and also the 364 day Treasury bill.

Depending on what you want, you can ask your banker to tell you which one is best because each one of those tenors will attract different rates. The 91 day Treasury bill will have a different rate from the 182 day Treasury bill and also, the 364 day Treasury bill. Before individuals can buy treasury bill directly from CBN but now it is no more like that. You have to go through your bank. The minimum amount required to buy treasury bill directly from CBN is about 50 million naira. So, you can see why you need to go through your bank or through your financial institution.

There are some banking apps that actually enable you to invest with N100,000, So, check them out and start investing.

Treasury bills are great option because they are very liquid right so if you need cash you can easily sell unlike other investment options you have to wait until the tenure expires. They are also safe because you’re lending to the Government. Remember, the government is one of the safest institutions you can think about lending money to. They offer you returns that is pretty much stable.

Another thing I want to get into is that people always think that when they hear about the rate of Treasury bill, for example, treasury bill is growing at 14% for a 364 day Treasury bill and then after a couple of months it has dropped to 13% or 12%, they will be asking, why are the rates dropping, right, that’s because a lot of time the rates are dictated by what’s happening in the economy. Remember, I said earlier, the government uses Treasury bills to raise money or to attract investors or to control money supply, so, depending on what is going in the economy at that time the Central Banking Authority will decide what’s the best rate to issue Treasury bill.

10 years ago Treasury bills were about 5% because at that point they didn’t want to attract a lot of investors now bring it down to the time when Nigeria was going through the recession period the CBN had to increase the rate to 18 to 25 percent because they needed to attract people into the economy, they also needed to ensure that people are not spending too much money, they needed to monitor money supply. Because of that the rate might change, so, you need to ask your bank of the current rate.

How is the rate of return on treasury bills calculated? This is how it works. Treasury bills are discounted upfront so for instance if you want to invest 100,000 Naira in Treasury bills, this is what will happen. Let’s say the rate on that 364 day Treasury bill is 10 percent, your account will be debited of 90,000 naira, so, it’s discounted up front right so you guys get your 10,000 naira interest immediately and then when you are paid back at the end of tenure the government will pay you back hundred thousand naira, so, technically we have 110,000 naira. For instance if the rate on treasury bill is 10% for a 364 day Treasury bill and you want to invest in 91 day Treasury bill you would have to divide 10 percent by 364 days and then multiply that by 91 days, that would be the rate of return you would get on your 91 day Treasury bill. If you also want to invest in 182 days treasury bills, you have to divide that rate by 364 days because the rates are annualized alright, so, if you hear 12% it means that you’re earning 12 percent per annum. it has to be divided by a full annual period and then divided by the period of time that you choose to invest. So I hope this helps you understand how treasury bills work. There are different ways to invest in treasury bill. Go to your bank ask questions. Ask them for what the current rates are and then there are also investment apps that can help you invest in treasury bill quite conveniently now. Technology has made things much easier for you. Remember the minimum required for most banks is hundred thousand naira.

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