How To Make Money From Investing In Treasury Bills In Nigeria – 2018

Treasury Bill is a short-term debt instruments – issued by the federal government through the Central Bank of Nigeria (CBN) in other to provide short term funding for the government.

To a layman’s understanding, it just a technique the government use to borrow money from the public and payback with interest after a period of time.

But there is more to it. Apart from sourcing of fund for the government, the CBN also use the treasury bills to control money supply in the economy.

Whenever the Central Bank wants to operate a Tight Monetary Policy using the Open Market Operation (OMO), the Treasury Bills and other debt instruments are what they capitalize on.

Once this bill is bought by the public, people will have less money available for real time investment and money creation will reduce within that period, not until the government buys the bills back from them and pay with the interest.

On the other hand, since treasury bill is risk free investment, people tamper with their saving to purchase it. Doing this will reduce bank liquidity, which will make the banks to increase interest rate on borrowings, and that will discourage borrowing.

The end product of this will be people complaining that there is no money, because most economic activities will seize.

To make it more effective – at this point the government will stop funding projects. This is the greatest way a the government can control inflation, all things being equal.

Unlike other federal government investment debt instruments like the Federal Government Development Bonds (FGDB) which are long term debt security, The treasury bills are much more liquid.

Treasury bill is refer to a liquid asset or a near money assets because it can easily be converted to cash.

Because they are debt instruments issued by the federal government. it is said to be zero- risk type of investment.

Treasury Bill are usually issued for a duration of 91 days, 182 days or 364 days. At the expiration of the time duration, your investment matures.

The interest rate which called the bid rate is not fixed but rather it fluctuates based on demand and amount offered by the Central bank.

How Does Treasury Bills Works?

The Central Banks will issue the treasury bills on behalf of the Federal Government at discounted prices which maturity periods will be between 91 days and 364 days.

At the end maturity period you chose, the government then buys back the bills at full price.

For instance: If you buy Treasury bills worth of ₦1,000,000 at 10 percent interest rate (bid rate), Central bank will debit your account with ₦900,000.

Knowing fully well ₦100,000 is the 10% of ₦1,000,000. When you subtract ₦100,000 from ₦1,000,000 your balance will be ₦900,000.

So what will be debited from your account will be ₦900,000 – meaning that your interest of ₦100,000 has already been paid to you upfront.

Lets look at it this way, if you want to buy a car of ₦1,000,000  and you are given 10% discount which is ₦100,000 what you will pay will be ₦1,000,000 – ₦100,000 = ₦900,000 the same concept is applied in financial assets such as treasury bills, and that is called discounting.

At the maturity of your investment you will be paid your ₦1,000,000 investment.

Where Can I Buy Treasury Bills?

Treasury Bills are sold at almost all the commercial banks in Nigeria. You can also get them from merchant banks.

Simple walk into any bank branch of your choice, go straight to the customer care and the them what you need. They will direct to the person in charge of treasury bills. Speak to the person in charge and make sure you understand the banks terms and conditions for bills.

Be sure of the interest rate they are offering you, and know if it worth it. If you are not comfortable with it you can as well check another bank.

Can I Sell My Treasury Bills Before Maturity?

If you are in need of the money you invested in treasury bills, you can sell your Treasury Bills before its maturity period, using the over-the-counter (OTC) market.

Weather you wish the sell the instrument for a higher price or lower price of the face value, it will depend on the Invisible Hands – the market forces which is demand and supply.

For instance: a ₦1,000,000 face value Treasury Bill may sell for less for ₦990,000 or more at ₦1,010,000.

The amount you will sell the Treasury Bill will depend on the yield expectations the potential buyers have for the treasury bill at that point in time.

What Is The Minimum And Maximum Amount Of Treasury Bills To Buy?

The minimum will depend on the bank you are dealing with. Most banks in commercial banks in Nigeria pegged treasury bills minimum at ₦50,000. So with as low as 50K will will definitely find a bank you will invest with.

As for the maximum, there is no maximum, it all depends on the available bills the bank have to sell. If there is a maximum at a particular bank then you can buy more from another bank, it is not a crime to buy from different banks.

Can I Rollover or Reinvest Treasury Bills?

Rollover here refer to adding the interest to the principal and using the sum to fund another treasury bills.

The Central Bank does not reinvest or rollover your investment automatically.

Rollover will depend on your bank, if you can give them a mandate to rollover your funds at the end of every maturity period.

Some banks in Nigeria rollover your treasury bill funds automatically at the end of every maturity period else you ask them not to do so. This is why I said earlier that you have to understand your bank terms and conditions regarding to buying treasury bills.

Benefits Of  Buying Treasury Bills

  1. Treasury Bills investment is risk free and the repayment is guaranteed from the federal government at the end of each maturity period.
  2. Treasury Bills are highly liquid, meaning that they can easily be converted to cash on demand.
  3. Treasury Bills allows investors to earn interest upfront.
  4. Interests earned from Treasury Bills are tax-exempt.
  5. Treasury Bills can be used as collateral for loan from any bank in Nigeria.

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