My last article about Fixed Income Investment was very well received and it did in fact bring up more questions. A lot of folks wanted to know more about Treasury Bills and how to invest in it. I have therefore compiled this guide to assist anyone who may be interested in investing.
What are T-Bills?
T-Bills are government guaranteed debt instruments issued by the Central Bank of Nigeria to control money supply in the economy.
Where can I buy T-Bills?
T-Bills can be bought through any official dealer. The easiest will be through your bank.
What is the minimum amount I can buy?
You can buy for as low as N1, 000 and in multiples of N1,000 thereafter. However, banks typically accept minimum purchases of N100,000 or more. I advise a minimum of N100,000 monthly or N1m annually.
When are they it usually sold?
T-Bills is sold every other Wednesday (bi-weekly) as announced by the CBN. The CBN announces issuances in their websites and in the pages of the newspaper. You can also ask your bank account officer to notify you ahead of an issuance.
How can I buy T-Bills?
To buy T-Bills 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 has your stop rate. If you are not sure of a rate, you can choose that advised by your bank.
What is the stop rate?
The stop rate (AKA Bid rate) is the interest rate that you are willing to receive for the principal that you are investing in the T-Bills. For example you can indicate an interest rate of 10 per cent as your expected interest rate and hope that it is selected, as it will most likely be different from that of other intending buyers.
How is the stop rate selected?
The CBN selects the bids that fall below the accepted marginal rates. The Marginal Rate is the minimum average rate for bids submitted within a bid window. For example if the marginal bid rate for a bid opened Wednesday September 4 is 11 per cent then bids falling below this rate will be accepted and those above rejected.
Can I still buy if my bid is rejected?
You can purchase T-Bills from the secondary market Over the Counter through a broker. This is also where buyers and sellers of T-Bills trade the notes in exchange for cash.
When is the interest paid?
interest element of T-Bills is paid to you upfront and credited to your bank account. For example, if you purchase a N100,000 T-Bills with an interest rate of 10 per cent, the CBN debits your account with N90,000 as such your N10,000 interest is paid up front. Upon maturity, you are paid the face value N100,000. The upfront payment of your interest makes your true yield actually higher.
What is a true yield?
True Yield is your actual return on investment. Using the example above, the initial yield for the N100,000 is 10 per cent. However, because they pay you interest upfront your true yield is actually the N10,000 in interest divided by the N90,000 actually deducted from your account. That is N10,000/N90,000 0r 11.11 per cent. This is thus higher than the 10 per cent coupon. The true yield is completely earned when you hold to maturity.
Can I roll over my investment?
The CBN does not rollover your investment automatically. However, you can give your bank a mandate to rollover the principal and interest on your T-Bills upon maturity. Reinvesting the income on TB’s provides the unique benefits of compounding interest.
What are the durations (tenor) for the T-Bill?
Tenors are usually for 91days, 182days and 364 days. Therefore, if you invest for say 91days, your investment will mature after three months etc.
Can I sell before maturity?
Yes you can sell T-Bills before maturity through the OTC market based on the forces of demand and supply. For example a N100,000 face value TB maybe selling for less or more depending on the yield expectation of the buyers. If your face value is trading at a higher price, it means you can sell your treasury bills at a profit as such your N100,000 can sell for N101,000 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 can sell for N99,000 or less.
Are T-Bills safe?
T-Bills are one of the safest forms of investment and are backed by the full faith and credit of the Federal Government of Nigeria.
Apart from the Interest rates, what are the benefits?
•A good source of steady stream of income.
•They are a good investment outlet for your free and disposable cash
•T-Bills are good investments for people who wish to save
•Income from T-Bills are also tax free
•T-Bills are considered liquid and can be converted to cash quickly
•They can be used as a collateral