Exploring opportunities in treasury bill investment

2010-02-04
THE PUNCH Newspaper- Gbenga Agbana


Despite the seeming stability in the equities sector of the Nigerian Stock Exchange, which resulted in the upward movement of stocks indices in the last few weeks, other investment options are still open to investors which are yet to be explored.

One of the options available include investment in treasury bills and government bonds. Treasury bills are very safe short-term investments issued by the Federal Government and some provinces. These are referred to as gilt edge instruments in the financial parlance, because they are considered risk free instruments, which guarantees constant returns on investment and helps investors to mitigate against losses.

Some investors recorded major loses in the equities sector of the NSE between April 2008 and December last year, before the market recovered early this year, but experts noted that treasury bills investment could be used as an investment option to mitigate the losses incurred on equities, since returns on it is guaranteed.

Diversification of investment portfolio is necessary because in developing and even developed economies, investors who put their eggs in a single basket got their fingers burnt recently during the global financial crises. Those who diversified their portfolios were able to weather the storm.

In some developed countries, governments issue treasury bills in very large denominations of $1m or so. Banks and investment dealers break these up and sell them to investors. Investors always buy a treasury bill at a discount to its face value. That means they pay less than what they will get back when the government cashes it.

Treasury bills are mostly offered in terms of one month to just under one year. An investor might pay $975 for a treasury bill and get back $1,000 when it matures one year later.

Investors‘ profit is stated as a percentage of their investment. In this case, it would be about 2.56 per cent ($25 on $975). Even though returns on treasury bills is a capital gain, the government treats the return as interest income, which is taxed at a higher rate.

Treasury bills are considered among the safest investments, especially when they have three months or less to maturity.

Should investors need their money before the treasury bills mature, they can always sell them on the open market through an investment deal

The returns on treasury bills are generally lower than for longer term investments. However, they are ideal investments when an investor cannot afford to risk his money. For an investor who believes that the stock market or bond market is going to slump, treasury bills can be a good place to park money for a short while. Big investors with lots of cash on hand might prefer to invest in treasury bills rather than put the money in the bank. This is because bank account deposits are insured to a maximum of $100,000.

According to the Kakawa Discount House Limited, a Nigerian company, treasury bills is an investment option that offers investors utmost security, as it is backed by the Federal Government of Nigeria Treasury bills. ‘‘It helps mitigate the re-discounting risk on Treasury bills by offering shorter tenors than what obtains in the primary market (i.e. call, 30 and 60day tenors). This means that rather than buy 91 or 182day Treasury bills, we offer you shorter-tenured bills.‘‘ The company said.

It is backed by the Federal Government of Nigeria and there is no better secured instrument in the country;

It is liquid because you can terminate your investments on call from seven days onwards; minimum amount of N1m minimum investment is required; and your investment can be used as collateral for borrowing; and Kakawa can give an undertaking to that effect.

Interest rate is determined by the CBN and discounted to the customer.

Tenor: Between 30 - 90 days with roll over option.

Alternatively, Kakawa can bid for customer at CBN rate for physical Bills (Primary Market), commission would be 1/8% of total bid value.

A stock broker, who is also the managing director of GTI Capital Limited, a company which deals in treasury bills, Mr. Abubakar Lawal, said, ‘‘The benefits are enormous. It is risk free, stable and the procedure of investing is to place orders.‘‘

Listing the benefits for small investors, another stockbroker, who is the Managing Director of Kinley Securities Limited, Mr. Boidun Okundalaiye, Said, ‘‘For small investors, there is a guaranteed percentage of return, which does not in absolute terms dependent on market instability. Investment can also be for a short period. For the procedure, those interested will need to approach their stockbrokers.”

 

Your comment

 

(E-mail)

 

 

 

News Archive