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Question
What is the difference between treasury bills and bonds? And how can one go about investing in either of them?
Answer
Understanding treasury bills and bonds, and how to invest in them is quite important, especially if you are looking to invest in government securities. Let’s break it down in simple terms so it’s easy to understand by using four criteria: duration, returns, risk and liquidity.
How do they work?
Treasury bills (or t-bills) are short-term borrowing instruments issued by the Central Bank of Nigeria (CBN) on behalf of the federal government. T-bills are sold at a discount, and the interest is paid upfront. For example, if you invest ₦100,000 at a 10% discount rate, you will actually pay ₦90,000. When the T-Bill matures, you receive the full face value of ₦100,000. So, your interest is effectively paid right when you make the investment.
Bonds, on the other hand, are long-term borrowing instruments and can be issued by the government or private firms. If you buy a corporate bond, you are simply lending the company your money.
Let’s talk about how long it takes to invest in treasury bills send bonds
Duration:
Treasury bills come in durations of 3 months, 6 months, and 1 year while bonds require your investments for a year and above. In summary, bonds have longer maturity periods of at least one year and pay interest every six months or annually while treasury bills have much shorter maturities, between 90 days to 52 weeks. Treasury bills are sold at a discount to their face value.
Why do people invest in treasury bills or bonds?
Liquidity, returns and risks:
T-bills are backed by the full faith and credit of the federal government of Nigeria, making them one of the safest investments. They are highly liquid and can be sold easily if you need access to your funds. Also, the returns are known upfront, so there are no surprises. How about bonds, why invest in them?
Bonds are also considered safe investments as they are issued by reputable institutions and offer a fixed rate of return ensuring your earnings are predictable over the investment period.
How can you invest in treasury bills and bonds?
1. Primary market: You can buy t-bills and bonds directly from the CBN through auctions. For t-bills, auctions are held every two weeks. The minimum investment amount for t-bills in the primary market is typically around ₦50,001,000. You can purchase newly issued bonds through authorised Primary Dealer Market Makers (PDMM), and the minimum investment amount is usually around ₦50,000,000.
2. Secondary market: For smaller investments, you can purchase T-Bills and bonds through authorised dealers like banks, stockbrokers, and discount houses. In the secondary market, investors can trade previously issued t-bills and bonds. The minimum investment for t-bills in this market is ₦100,000, and you can invest in multiples of ₦10,000. Bonds can also be bought through mutual funds or exchange-traded funds (ETFs) that include bonds.
Where does the FGN Savings Bond come in?
The Federal Government of Nigeria (FGN) Savings Bond offers a great opportunity for small savers to earn more on their money compared to regular savings accounts. Managed by the Debt Management Office (DMO), these bonds provide a safe investment backed by the government’s full faith and credit. Investors get quarterly interest payments, and the income from these bonds is tax-free, which makes them even more appealing.
These bonds are also very flexible and accessible. They can be traded on the Nigerian Stock Exchange and used as collateral for loans. With a minimum investment of just ₦5,000 and a maximum of ₦50 million, they are open to a wide range of investors. Issued monthly with terms of 2-3 years, they help people plan and save for personal projects, benefiting all classes of people and promoting financial inclusion.
In summary, both t-bills and bonds are good options for preserving capital and earning steady returns with low risk. As a smart investor, you should however consider the inflation factor which could thin out your returns. It really depends on your financial goals and how long you plan to invest.
At MoneyAfrica, we encourage individuals in different phases of life to take charge of their finances. If you have any questions or concerns about your investments or you would like to discuss your portfolio strategy further, join our community by clicking here.
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