Treasury Bills are guaranteed debt instruments issued by the Central Bank of Nigeria (CBN) to raise money and manage liquidity in the system. By buying Treasury Bills, you are lending to the Federal Government. Treasury Bills, like FGN Bonds are risk-free investment instruments (Please read A Guide on How To Invest In FGN Bonds).
Just about anyone can invest in Treasury Bills and the tenors are usually 91 days, 182 days and 364 days. One very important feature of Treasury Bills is that the interest payable on it is not subject to withholding tax. Like bonds, it can also be used as collateral for loans.
FEATURES / BENEFITS OF TREASURY BILLS
- Interest payable on Treasury Bills is not subject to withholding tax
- The interest is payable upfront giving higher effective yield
- Treasury Bills can be used as collateral for loans and other securities
- Low risk of loss of value
- High liquidity
- Upfront interest payment supplies easy cash for re-investment or other uses.
HOW DOES IT WORK
If an investor buys a Treasury Bill worth of N100,000 at 10% interest rate, the CBN will debit the investor’s account with N90,000 as such his N10,000 interest is paid up-front. At maturity, the investor gets N100,000 paid into his account. His total inflow from the transaction is N110,000 i.e. capital + interest.
HOW TO INVEST IN TREASURY BILLS
Nigerian Treasury Bills are usually sold bi-weekly (every 2 weeks) in a primary auction which holds on Wednesdays. You can buy treasury bills through the banks or brokers. It is better you go through a broker to help you with the details. Here are steps you can adopt to buy into Treasury Bills:
- Approach a broker or your bank before the primary auction. Request for the bid form and fill same. Banks and brokers differ in their minimum investment, while banks accept minimum purchases of N100,000 or more brokers accept lower.
- Establish your investment amount. Now, the minimum amount required to be invested is N10,000 and then multiples of N1,000.
- Brokers operate with different rate for service rendered. Weigh your options critically before settling with a broker.
- If you do not have an account with the broker, it is required that you open one. Request for the forms and complete them. After you have concluded your registration, you will be required to fund your account with the amount that will cover the transaction.
- After that, the broker will place a bid for you and if your bid is successful, your investment will be booked and money will be moved from your account. Like the case of FGN Bond, your money is not domiciled with your broker, but with a Custodian of your choice. However, you will be charged a fraction of a percentage by your broker for service rendered and Custodian fees.
- You will afterwards be credited with the interest on the investment and issued your investment paper showing details of your investment and that of the Custodian where your investment is domiciled.
- If your bid was unsuccessful, your money will remain in your account with your broker. Since you missed out, you have two choices – wait for the next primary auction or buy from your broker (secondary market). Brokers are bulk buyers who resell to others.
Investing in Treasury Bills is a risk free venture. You can decide to reinvest your up-front interest in the secondary market or use it to purchase another money market instrument or anything you like. It is up to you.
I wish to recommend Treasury Bills to salary earners who collect huge money as upfront, save it in their bank account to pay house rents. You can actually invest that money in Treasury Bills, collect your interest upfront, use it for something meaningful and wait for maturity. When it is time to pay you rent which you would have timed to mature at that date, you will just withdraw the money and pay your landlord. This way you can actually eat your cake and have it.
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