Investing in Treasury Bills in Nigeria

Nigerian Treasury bills (NTB) are short term debt securities issued by the Federal Government of Nigeria. They are discount securities. NTB pay a fixed amount at maturity, called face value, with no interest payments in between. They are issued at a price below face value with the return to the investor being the difference between the price the NTB is issued and the face value. The maturity of the treasury bill is 1 year (364 days) or less (between 91 days and 364 days). The treasury bill rates set the benchmark for the rates on other money market securities like fixed deposits.

Treasury bills are sold in the primary market and secondary market via the commercial banks acting as agents for the Federal Government (Note: there may be other agents of NTB like the discount houses and merchant banks). Each primary auction is announced quarterly by the Central Bank of Nigeria (CBN). See picture for CBN Q4, 2015 Treasury Bill auction schedule announced on 4th September 2015. Investing in treasury bills is open to everyone – companies and individual investors.

CBN Tbill Q4

The amount of securities being applied for must be a minimum value of N10,000 and in multiples of N1,000 thereafter (Different banks have different minimum amount). Interested investors complete application forms obtained through the authorized dealers (Banks and Discount Houses). Most times, banks require completed applications to be submitted at most 2 days before the CBN announced dates as the banks are required to submit their bids by 1:30pm on the Wednesday preceding the announced date. Different banks have varying ways of allowing investors specify the discount rate (more on what the discount rate is later). However, the most common is the bank choosing to specify the rates on behalf of the customer. However, the customer has the liberty to specify the rate at which he is willing to give out the funds. If the rate is higher than what the FGN is willing to give, the bid will fail.

Calculating the interest on your NTB investment

Let’s define the following notations:

V = Face value of the investment in naira (minimum value of 10,000 and subsequently in multiples of 1,000)

P = Price paid (this is the actual amount to be debited by the bank. Note: this does not include bank charges)

D = Discount from the face value in naira (this is the difference between the face value and the price paid)

In simpler words, I tell my bank I need to invest V naira. The bank will debit me P naira and pay me V naira at maturity. My earning (interest) is D. Let’s move on to describe how to calculate P.

T = time to maturity (this is the number of days left before the treasury bill matures. In a primary auction, it is either 91, 182 or 364 days).

r = Discount rate (this is the rate normally quoted during the bids. It is the rate you apply to the face value to discount it to the price paid)

y = yield (this is the interest rate you apply on P for a tenor of T to get face value of V. It is sometimes confused with the discount rate, r. It’s best to view it as a reverse of r – in the sense that r is applied to V to get P while y is applied to P to get V).

To calculate the price paid i.e. actual debit by the bank (not including bank charges), apply the following formula:

P = V – D = V – (V * r * T/365)

Let me use figures to explain it better:

Assuming I have 5 million naira to invest at a discount rate of 13% with a 91 days time to maturity on 17th September 2015, the bank will debit my account the following:

5,000,000 – (5,000,000 * 13% * 91/365) = 4,837,945.21 (Note: In case of a leap year, use 366 in place of 365. If the tenor straddles a non leap year and a leap year, use 365 for the number of day that’s fall in the non leap year and 366 for the number of days that fall in the leap year). You could download the NTB Excel Calculator in the link below:

Download NTB Excel Calculator

The bank debits charges for the transaction. The charges include the custody fee and the transfer fee.


13 Responses to “Investing in Treasury Bills in Nigeria”

  1. Please whenever a bank (secondary bank) buys treasury bills from another bank(primary bank), how does the CBN confirm who the current owner of the treasury bills is, so as to know who to pay interest to, on maturity of the t-bill.

    • Secondary market transactions are consummated using a trading platform. At the end of each day, each bank transmits details of these trades to CBN via an interface (One bank’s position is debited while the other bank’s position is credited with CBN). At maturity, CBN just debits the bank’s book with it and credit the bank the interest/asset value. Hope this clears your question.

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