How to invest series - Treasury bills in Nigeria (Infographic)

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I got a question from one of you asking me how to invest in treasury bills, so I decided to start a how-to-invest education series where I provide detailed information on how to invest in certain asset classes. We'll start our first series with a key asset class in Nigeria- Treasury Bills. I discovered treasury bills some years ago and I've found it to be an interesting asset class, especially in Nigeria. I say 'especially in Nigeria' because you're less likely to get average discount rates between 14% to 22% when you invest in treasury bills in a developed country like the USA for instance. and that's because it's safe. Low risk , low returns Lending to the Nigerian government (that's what happens when you purchase government securities) is also safe but let's just say when you lend to a government that really needs your money or a government that needs to mop up excess liquidity, you earn higher rates. Now, it's time for some learning....Let's get into it, shall we?     What is a treasury bill? A treasury bill is a short-term security issued at a discount for a tenor ranging from 91 to 364 days (they mature in one year or less), such that the income received is the difference between the purchase price and the amount received at maturity or prior to the sale. This simply means treasury bills are sold at a discount. For instance, if you purchase treasury bills with a face value worth N100,000, issued at a discount rate of 10%, your bank account will be debited with N90,000. However, when the treasury bill matures, you will receive the the face value worth N100,000 The difference between the discounted purchase price and the face value of the T-bill is the interest income you earn. In my example, the interest income earned is N10,000 What determines the interest income I earn on treasury bills? The interest income you earn on treasury bills is determined by the discount rate issued by the Central Bank of Nigeria (CBN). The discount rate is  largely market determined, based on demand for and supply of funds in the money market. Treasury bills are financial instruments used in developed and developing countries by governments to fund capital projects like roads, hospitals, schools etc. They are also an effective way to control the liquidity of the money supply; if liquidity increases in the market, prices will rise and inflation will rise too. Typically, you'll find higher discount rates in developing countries due to the constant need to either raise funds for capital projects or mop up excess liquidity Treasury bills with longer tenors usually attract a higher discount rate i.e. 91 days T-bills currently yield between 13%-14%, while the 364 days T-bills yield above 15%. How can I purchase treasury bills? In Nigeria, individuals who wish to purchase treasury bills have two options; They can purchase via the primary market or secondary market. In the primary market, treasury bills are auctioned. Subscriptions at this market are for 91 days, 182 days and 365 days. An advertisement, inviting bids for the securities, is placed in selected national dailies by the CBN in advance of the auction. The minimum value of securities that must be applied for is N10,000 and in multiples of N1,000 thereafter. Interested individuals are required to obtain and complete application forms through authorised dealers (banks and discount houses). Interested authorised dealers may submit tenders on their own account or on behalf of their customers. The secondary market is the next option if your bid in the primary market is not successful.  At the secondary market, treasury bills  are sold through a daily block trading between primary dealers/market makers. Secondary trading in treasury bills occurs in the over-the-counter (OTC) market. The difference between both markets is the primary market is the market for new issues of all government securities while the secondary market is a market for trading previously issued securities. therefore, tenors of the securities traded in the secondary market are shorter than the original tenors. Discounts rates are typically lower in the secondary market as well. That simply means a 91-day treasury bill issued at 15% discount rate in the primary market may be sold as a 89-day treasury bill at 13.5% discount in the secondary market. That's because the maturity dates remain the same as issued in the primary market Point to note - always ask your bank/discount house to bid in the primary market for you first before you settle for secondary market rates Why treasury bills? Treasury bills are short term investment securities which are ideal for your safety bucket. They can be easily liquidated if you really need your funds at any time. They are available throughout the week, all year round,  at specified rates in the secondary market and on specific dates in the primary market. They are safe and have zero-default risk. The yield/ interest income on investment is also tax-free. Treasury bills are exempted from federal and state income taxes However note that longer-term issues (364 days/182 days) may have more price volatility than shorter-term issues (91 days), so it might be better to invest in the shorter time issues and repurchase once it matures.   To purchase treasury bills in Nigeria, please visit your bank or call a qualified and professional investment manager to help you plan and invest in Nigerian Treasury Bills. Kindly note this is not investment advice in any way but merely information you need to take action on your investment plans. Update - As at March 2017, the debt management office stopped the sale of treasury bills to retail investors.The FGN savings bond offers a retail option to retail investors