Treasury Bills are a type of debt instrument issued by CBN on behalf of the government to raise funds for spending. Treasury notes are another tool the CBN employs in its efforts to manage the economy's money supply.

Purchases of Treasury Bills must be made through a recognized dealer. The most convenient way to purchase treasury bills in the modern day is through a bank's mobile application. The i-invest service offered by Sterling Bank is a good illustration.

Once every two weeks, the CBN holds an auction to sell Treasury Bills where sellers are asked to submit offers, and then the lowest-priced bidder is chosen based on the market average.

Do you want to know more about Treasury Bills? Then read on as this article will discuss extensively all you need to know about Treasury Bills.

Treasury Bills: Important Questions Answered Already!

Reading on means you have much interest in Treasury Bills and that's why I’ve decided to create a detailed answer section to handle all your questions. Read on to get educated on the importance of the market.

What are Treasury Bills?

Treasury Bills or T-Bills are short-term government-backed securities issued by the Central Bank of Nigeria. They are issued if the government has a temporary need to borrow money. In a maximum of 364 days, they will be fully mature. T-Bills are offered for sale at a discount to their face value. T-bills are distinct from other short-term bonds and have lower returns than high-risk alternatives.

How Can I Buy Treasury Bills?

To purchase Treasury Bills, you will need to go to your local bank and ask for the appropriate paperwork. You are responsible for filling out the form with your personal information, specifying the quantity that you are interested in purchasing, as well as your bid price.

You will only need to fill out a registration form once if you use the mobile application that banks have developed for purchasing Treasury Bills.

What Is the Bid Rate?

The bid rate, which is often referred to as your STOP RATE, is the estimated annual percentage return (APR) that you are anticipated to get on the principal amount that you invest in the TBs. As an example, you can choose to say that you anticipate an interest rate of 10%. Your offer price is most likely going to be unique in comparison to that of the other potential purchasers of TBs.

How Is the Bid Rate Selected?

The CBN will only accept those offers that are lower than the allowed marginal rates. The Marginal Rate is the lowest possible average rate for bids that have been filed inside a certain bid window. For instance, if the marginal bid rate for a bid that was opened on Wednesday, June 27, was 11%, then offers that fell below this rate would be allowed, but bids that fell over this rate would be rejected.

Are Treasury Bills Safe?

Treasury Bills, which are backed by the complete confidence and financial resources of the federal government of Nigeria, are often regarded as among the most secure investment options available.

What is a True Yield?

The return you get is what we call "True Yield" (ROI). If you use the N100,000 from before as an example, we may estimate an initial return of 10%. The real return, however, would be the N10,000 interest payment split by the N90,000 that was taken out of your account, since it is paid to you upfront. N10,000 out of N90,000, or 11.11%. Hence, it exceeds the 10% discount offer. Investing for the long term is the only way to get the Real Yield.

What are the Pros and Cons of Treasury Bills?

Pros

• Zero default risk since T-bills has a U.S. government guarantee.

• T-bills offer a low minimum investment requirement of $100.

• Interest income is exempt from state and local income taxes but subject to federal income taxes.

• Investors can buy and sell T-bills with ease in the secondary bond market.

Cons

• T-Bills offer low returns compared with other debt instruments as well as when compared to certificates of deposits (CDs).

• The T-Bill pays no coupon—interest payments—leading up to its maturity.

• T-bills can inhibit cash flow for investors who require steady income.

• T-bills have interest rate risk, so their rate could become less attractive in a rising-rate environment.

Factors That Affect Treasury Bill Prices

1. Maturity

The price of a T-bill is heavily influenced by the length of time remaining before it matures. When compared, a bill for one year will result in a greater profit than one for three months. As a result, investors get a greater rate of return to make up for the fact that their money will be invested for a longer period.

2. Risk

The level of risk-taking that investors are willing to take is another factor that affects the price of T-bills. As the economy improves, Treasury bills become less desirable, and as a result, their prices fall. Other debt instruments, on the other hand, give a larger return. T-bills, on the other hand, can fetch a greater price owing to the lesser risk associated with them in times when the economy and the markets are unstable and other forms of debt securities are seen as having a higher level of risk.

3. Inflation

T-bill prices might be affected by the current inflation rate. If the inflation rate is 5% and the T-bill discount rate is 3%, for instance, investing in T-bills would be unfavorable since the actual rate of return would be negative. This means there will be less demand for T-bills, leading to the reduced pricing.