How to invest in Nigerian Treasury Bills secondary market

With the March 7, 2017 money market restructuring that saw the introduction of FGN Savings Bonds, the minimum subscription for investing in Nigerian treasury bills through the primary market (bi-weekly auction) is now N50Million. This means most investors may not be able to access the primary market. Hence they may only be able to buy treasury bills through the secondary market.

The process of buying treasury bills through the secondary market is much simpler than buying through the primary market. Treasury bills on sale at the secondary market comes from investors who bought previously from the primary market.

Brokers (banks, discount houses, and stockbrokers) buy treasury bills from the primary market to sell to retail investors (like you) for a profit. The interest rate offered is lower than the marginal rate. The marginal is the rate at which the Central Bank issues the Treasury bill. The difference is their margin or profit

Also, an individual investor may need money and decide to liquidate his/her investment before maturity by selling at the secondary market.

Buying treasury bills from the secondary market

Whatever the reason for the sale, treasury bills on offer for sale at the secondary market were purchased at the primary market hence some days have elapsed hence the tenor of the investment depends on how many days are left to maturity on the Treasury bill.

For example, if someone buys a 182 days tenor treasury bill at the primary market and decides to sell it 20 days later, the remaining tenor in the instrument will be 162 days, as 20 days have already elapsed.

The first step is to contact a broker. They are either licensed dealers or go through licensed dealers to buy for their clients.

The broker informs you what treasury bills are available, their tenor, and interest rate. Interest on treasury bills is paid upfront. This means your earned interest will be credited back to your account the moment the transaction is concluded. The face value will be returned to you upon maturity of the investment.

Note that brokers also have minimum subscription amounts they accept. If you have sufficient funds, you can select which Treasury bill (and rate) you want to buy.

The secondary market subscription process

You will be:

• Given a subscription form to fill and sign
• Required to fund your account (make a deposit into your account with the broker to the tune of the amount you want to invest)

After your instruction is executed, the Treasury bill will be purchased in your name (you will be issued an investment letter), the discounted value and other charges will be debited from your account. Your upfront interest will be left in your account with your broker, which you can reinvest and request to be remitted back to you.

You can buy the book How to invest in treasury bills here.

As an illustration, let’s assume you go to your broker (bank, etc.) to purchase N200,000 worth of 364 days tenor treasury bills. You were told that 345 days tenor treasury bills at 17% are available for sale. If you believe that is a good deal. You give the go-ahead to conclude the transaction.

Assuming a Custodian fee of 0.10% and dealer commission of 0.125%, your investment summary in the investment letter will look something like this:

Face Value: N200,000
Discounted Value: N167,774.73
Discount Rate: 17%
Value Date: 5th January 2017
Maturity Date: 17th December 2017
Tenor: 345 Days
Upfront Interest: N32,225.27
Custodian Fee (0.100%): N200.00
Commission (0.125%): N40.25
VAT 5% on Custodian Fee: N10.00

The upfront interest is calculated using the simple interest formula

:

I = P x T x R/100

Where I is interest per annum

P is principal sum invested

T is time in years

R is interest rate in percentage

I = 200,000 x (345/364) x (17/100)

= 32,225.27

The sum of N200,000 will be withdrawn from your account to execute the transaction, after which N32,225.27 less charges will be credited back to your account as upfront interest. Upon maturity of your investment (345 days later), the face value of N200,000 will be credited back to your account.

You can buy the book How to invest in treasury bills here.