How to Calculate Treasury Bills in Nigeria

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What are Treasury Bills?

Treasury Bills are debts instruments issued by the CBN on behalf of the government in order to finance expenditure. Treasury bills are guaranteed by the government. Another function of the issuance of treasury bills by the Central Bank of Nigeria is that it controls money supply in the economy.

How Treasury Bills are sold

Treasury Bills are sold every other week (bi-weekly) via an auction conducted by the CBN. Buyers are requested to quote bids after which the average minimum bid is selected.

How to Calculate Treasury Bills in Nigeria

Minimum amount for Treasury Bills

In March 2017, the Federal Government increased the minimum amount required to partake in its biweekly treasury bills auction from N10, 000 to N50 million. However, you can still invest in treasury bills even if you do not have a whooping amount of 50 million naira.

Ways you can invest in Treasury bills

Treasury bills in Nigeria can be purchased either through primary or secondary markets. A primary market involves a direct purchase from the Central Bank of Nigeria through a public auction carried out in two weeks.

On the other hand, the secondary market involves buying it from an existing holder, which could be through a bank or stockbroker. Treasury bills can be bought through any official dealer. The most popular official dealers in today’s market are banks. You can purchase treasury bills via banks’ Treasury bill mobile application.

Investing in Treasury bills as a secondary market

Banks and other financial institutions usually hold Treasury bills having bought it in the primary market directly from the CBN. There are two ways in which you can invest in this opportunity as a secondary market. You can decide to buy Treasury bills in Nigerian banks or get it through stockbrokers. Investment via banks is simple and the most reliable.

To invest in treasury bills via banks, the first thing you need to do is get in touch with your bank. Note that the bank determines the minimum bond you can buy. Some banks offer N50, 000 as a minimum, while others go as high as N500, 000. There are many other options available to you via which you can invest in treasury bills. For example, some banks pull together resources from many investors to raise enough money and buy these bonds in the primary market. You could get in touch with such investors and make your investment. Another way is buying from an online broker. Buying from an online broker is less stressful as you can register and go through the entire process at your convenience. Most online brokers accept a minimum of N100,000.

What is the bid rate?

The bid rate is also known as your Stop rate. This is the interest rate that you have indicated to receive for the principal that you are investing in the Treasury bill purchase. You can indicate an interest rate of 10% or 15% as your expected rate. Bid rates differ and your bid rate can be/ will most likely be different from that of other intending buyers of same Treasury bill.

How is the Bid Rate selected?

The Central Bank selects the bids that falls below the accepted marginal rates. The Marginal Rate is the minimum average rate accepted for bids submitted within a bid window.  For example, if the marginal bid rate for a bid is 11% then bids falling below this rate will be accepted while those above 11% will be rejected. If you do not have a stop rate or you are not sure of a rate, you can have your bank choose a rate for you. However, this does not guarantee that the bank rate will be chosen or will be the best.

How often are Treasury bills auctioned?

Treasury bills are issued for a duration referred to as tenor. In Nigeria, three tenors are used. These are 91 days, 182 days, or 364 days. The Central Bank of Nigeria does the auctioning exercise every two weeks. The auction is open to willing investors.

How to calculate Treasury bills in Nigeria

Remember that the Federal government issues Treasury bills at discounted prices and upon maturity, the government repurchases them at a full quotation. For example, if an investor buys a N300, 000 Treasury bill at a discounted rate of N200, 000 for 364 days. After the purchase, the Federal government writes an IOU (I owe you) of the initial amount, N300, 000 and pledges to pay after 364 days.

Upon expiration of the set tenure, the government buys back at the full price- N300, 000. The interest rates for these bonds are not fixed. The Central Bank of Nigeria and the demand for the Treasury bills determine the stop rate.

You can calculate your return on investment upon investing in Treasury bills. This is the amount you should expect at maturity. Here is how to calculate your returns.

If you buy a 364-day Treasury bill worth N300, 000 at your bank or from a stockbroker at an interest rate of 10%.

You can calculate the upfront payment using the formulae below.

Interest = Principal × Time × Rate/100

Principal = N300, 000 Time = 364 days (equivalent to 1 year) Rate = 10% all over 100

N300,000 × 1 × 10/100 = N30,000 This, therefore, means that you will get paid N30,000 at the start of your investment and the remaining N270,000 is remitted to the Central Bank of Nigeria. The figures above should tell you that your investment is N270,000 and not N300,000 because you get N30,000 back.

How then do you determine your actual rate of return?

Rate = (Interest × 100)/ (Principal x Time) (30000 × 100) ÷ (270000 × 1) = 11.1%

This is how you to determine your interest rates on Treasury bills in Nigeria.

Investing in Treasury bills in Nigeria is easy and profitable. However, if you wish to invest in this sector, you must familiarize yourself with the business first before you venture into it.

 

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