This article explained the step-by-step process of how to invest in Treasury Bills for profit in Nigeria in a few months.
Treasury Bill is a short-term debt instrument – 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 is just a technique the government uses to borrow money from the public and pay it back with interest after a period of time.
But there is more to it. Apart from sourcing funds for the government, the CBN also uses treasury bills to control the 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 pays with interest.
On the other hand, since the treasury bill is a risk-free investment, people tamper with their savings to purchase it.
Doing this will reduce bank liquidity, which will make the banks increase the 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 cease.
To make it more effective – at this point, the government will stop funding projects. This is the greatest way the government can control inflation, all things being equal.
Unlike other federal government investment debt instruments like the Federal Government Development Bonds (FGDB) in Nigeria, which are long-term debt security, the treasury bills are much more liquid.
A Treasury bill is referred to as a liquid asset or near money asset because it can easily be converted to cash.
Because they are debt instruments issued by the federal government, it is said to be a zero-risk type of investment.
A Treasury Bill is 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 is called the bid rate, is not fixed, but rather it fluctuates based on demand and the amount offered by the Central bank.
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How Do Treasury Bills Work
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 ₦1,000,000 at a 10 percent interest rate (bid rate), the Central bank will debit your account with ₦900,000.
Knowing fully well ₦100,000 is 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.
Let’s look at it this way, if you want to buy a car for ₦1,000,000 and you are given a 10% discount which is ₦100,000 what you 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
To invest in treasury bills, they are sold at almost all the commercial banks in Nigeria. You can also get them from merchant banks.
Simply walk into any bank branch of your choice, go straight to customer care, and them what you need.
They will be directed 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 is worth it. If you are not comfortable with it, you can also check with 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 their maturity period, using the over-the-counter (OTC) market.
Whether you wish the sell the instrument for a higher price or a lower price of the face value, it will depend on the Invisible Hands – the market forces, which are demand and supply.
For instance: a ₦1,000,000 face value Treasury Bill may sell for less than ₦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.
The Minimum And Maximum Amount Of Treasury Bills To Buy
The minimum to invest in treasury bills depends on the bank you are dealing with. Most commercial banks in Nigeria pegged treasury bills minimum at ₦50,000. So with as low as 50K 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 has 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 refers to adding the interest to the principal and using the sum to fund another treasury bill.
The Central Bank does not reinvest or rollover your investment automatically.
Rollover will depend on your bank if you can give them the mandate to roll over your funds at the end of every maturity period.
Some banks in Nigeria roll over 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’s terms and conditions regarding buying treasury bills.
Benefits of Investing In Treasury Bills
- Treasury Bills’ investment is risk-free, and the repayment is guaranteed by the federal government at the end of each maturity period.
- Treasury Bills are highly liquid, meaning that they can easily be converted to cash on demand.
- Treasury Bills allow investors to earn interest upfront.
- Interests earned from Treasury Bills are tax-exempt.
- Treasury Bills can be used as collateral for a loan from any bank in Nigeria.
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