Omodele Adigun
Investors looking for passively investment in Nigeria, can sit back, relax and make their money work for them by investing in Treasury Bills.
Treasury Bills(TBs) is a type of government securities issued on behalf of the Federal Government by the Central Bank of Nigeria (CBN) to control money supply in the economy.
But unlike other government securities such as Federal Government of Nigeria(FGN) Bonds, Federal Government Development stocks (FRNDS) which are long term in nature, TBs are short term securities issued at a discount for a tenor ranging from 91 to 364 days, which yields no interest.
How does the discount work?
If you buy T-bills worth of N500,000 at 10 per cent discount rate, CBN will debit your account with N450,000, leaving a balance of N50,000.
“This means that your interest of N50,000 has been paid to you upfront.When your investment matures, you are still paid your N500,000.This shows that you were actually paid N550,000 for your investment of N500,000”, says praticalbusinessideas.com.
Tenor
Tenor is the duration of the investment.It is how long you are willing to let your funds stay with the Federal Government.Tenor is usually in 91 days(3months), 182 days(6months) and 364 days(one year). Your investment matures after the expiration of the tenor.
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How do I buy T-bills
According to CBN, T-bills can be purchased both at the primary and secondary markets. The following steps are the procedures laid down by the apex bank Primary Market. This is where new issues of securities are available for sale.
The market for new issues in all government securities is the Issues Office, Central Bank of Nigeria. Secondary market is a market for the trading of previously issued securities.
Hence, tenors of the securities traded are shorter than the original tenors. In the case of treasury bills, the market is within and outside the Central Bank of Nigeria.
The market in the CBN is located at the Securities Dealing Office and Settlement and Control Office, while the outside markets include Banks and Discount Houses.
Primary market Procedure for investing in treasury bills All investments are by auction Subscriptions at this market are for 91,182 and 365 days. “An advertisement, inviting bids for the securities is placed in selected national dailies in advance of the auction. The amount of securities being applied for must have a minimum value of N10,000 and in multiples of N1,000 thereafter.
Interested investors should obtain and complete application forms through authorized dealers (Banks and Discount Houses and Stock brokers). Interested Authorized dealers may submit tender on their own account or on behalf of their customers.
Therefore, subscription is open to banks, discount houses, corporate bodies, institutions and individuals. Tenders for the Bills or Certificates are submitted on Mondays, Tuesdays and Wednesdays before 1.30p.m on the prescribed printed forms and in sealed envelope marked “TENDER FOR BILLS OR CERTIFICATES”.
Pricing and Allotment:
Successful subscribers at the auction are allotted applying the Dutch, Multiple price auction system. Under the system, successful applicants pay for their allotment at the price quoted by them. The result of the tender is announced before the close of business on Wednesdays.
Allotment letters are issued to successful tenders on Thursday while payment in full for the amount of the successful tender must be made to the CBN not later than 1.30 p.m on the issue date – Thursdays. The accounts of the authorized dealers which must be funded are debited with the cost.
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Secondary market procedure for investing in T-bills through Open Market Operation (OMO) All investments are through auctions Notice, inviting bids is forwarded to licensed Discount houses and banks a day preceding the auction.
Subscriptions are open to the general public, that is, banks/discount houses, government agencies, corporate bodies institutions and individuals.
All applications must, however be routed through licensed discount houses. The amount of securities being purchased must have a minimum value of N10,000 and in multiples of N1,000 thereafter. Each applicant must state the discount rate and the amount of securities being applied for.
Successful applicants at the OMO auctions are allotted using the Dutch, multiple pricing system. Under this system, securities are allotted to applicants at the rate quoted by them.
The accounts of the successful applicants are debited with the cost through the discount houses. Results of the OMO auction are announced through the discount houses and banks; and on the following day through the media.
Authorised Dealer Banks and Discount Houses and other institutions that maintain accounts with the CBN have direct access to the CBN and they can also give mandate for automatic investment of idle funds on their accounts.
Other investors would communicate their intention through the authorized dealers. Trading can be undertaken any day of the week during approved banking hours. Rates at this market are administratively fixed and as such are lower than rates obtained through auctions.
True yield A true yield is calculated as the actual return on your investment.
According to practicalbusinessideas.com, the initial yiels for N500,000 at 10 per cent is N50,000.”However, because your interest is paid upfront, your actual yield is the N50,000 divided by the N450,000 deducted from your account, multiplied by 100.That is 11.11 per cent, which is higher than the 10 per cent. You can only enjoy true yield when you hold your investment to maturity.”
Can I sell my T-bills before it matures?
If you are in urgent needs of funds, you may sell your T-bills before it matures, using the OTC market. Whether you will sell for more or less of your face value depends on the forces of demand and supply.
Here is an instance; a N505,000 (higher value) provided your face value is trading at a higher price. However you may have to sell at a loss (N545,000) if your face value is trading at a lower price.
Benefits of T-bills
Yield / Income on investment is realizable upfront and can be automatically reinvested for a higher income. Yield / Income on investment is competitive with returns on other money market instruments of similar maturities.
The securities have zero-default
risk. Yield/Income on investment is tax-free. The securities can be used as collateral for short-term borrowing from banks