16 | The Lion King
How to
invest
smartly in
treasury
bills
By Ifeyinwa Olloh
T
reasury Bills (T-Bills) are risk
free investments. Risk free
means that whatever money
you invest in treasury bills, you
are sure to get it back because
the Federal Government guaran-
tees it.
Treasury Bills are sold in the pri-
mary and secondary markets.
Primary market simply means
that you are buying newly issued
treasury bills directly from the
Central Bank and not from any
person or entity that had previ-
ously bought from the Central
Bank and is reselling.
The secondary market means
that you are buying from an
entity that has bought from the
Central Bank (in the primary mar-
ket) and is reselling. This article
is primarily about how you can
maximise your returns when you
buy treasury bills.
T-Bills are usually issued for 91
days, 182 days and 364 days in
the primary market and avail-
able in varying tenors in the
secondary market. You will thus
be repaid at the end of the tenor
that you have chosen. When the
Central Bank advertises or makes
offers of treasury bills, only ap-
pointed Money Market Dealers
(i.e. banks and discount houses)
can bid directly on your behalf at
the auction. A smart retail inves-
tor can therefore maximise his
or her returns in T-Bills if he or she
understands how T-Bills work.
The first thing that the investor in
T-Bills needs to understand is that
the interest rate on T-Bills is paid
up-front (called discounted). So,
unlike term deposits that pay
interest at the end of a month or
year depending on the tenor, the
Central Bank pays the interest on
your T-Bills at the very point when
you are making the investment.
This simple fact can make a lot of
difference on how much money
you make on your T-Bill invest-
ment.
Let us take an example; the
Central Bank of Nigeria (CBN)
is set to issue 364-day T-Bill with
an expected interest rate of say
10%. Two investors are interested
in investing One Million Naira in
the T-Bill. The ordinary investor
will tell his dealer or Relationship
Manager to invest ‘One Million
Naira’ in this T-Bill and handover
the One Million Naira to make
the investment.
The smart investor, who also
plans to invest One Million Naira,
will however tell his dealer that
he plans to invest One Million
Naira plus the N100,000 that will
be paid as upfront. In essence,
he has more than One Million to
invest because of the nature of
the instrument. Although he has
One Million to invest, N100,000
(10% of N1m for 1 year) interest is
immediately paid upfront into his
account, which he has access to
and can invest immediately.
At the end of 364 days, the smart
investor will not only earn inter-
est on his N1m but also on his
N100,000 upfront. If he repeats
this investment pattern on a
larger amount over a number of
years, he will soon become richer
than the other investor.
Treasury Bills are a great invest-
ment opportunity for your free
and disposable cash. Where you
need this cash before maturity,
the investment can be re-dis-
counted and you get your cash
quickly. Rediscount means you
will have to pay back the interest
you have received upfront but
calculated at new or prevailing
rates. T-Bills are good invest-
ments for people who wish to
put the money away. Their rates
are attractive and not subject
to withholding tax and can be
used as collateral for borrowing
purposes.
Relationship managers and advi-
sors are always on hand to give
advice on investment opportuni-
ties, rates and tenors.
