Question: I don’t know how the interest calculations work for lower tenor treasury bills. For example, if I invest N1,000,000 in treasury bills for 91 days, how is the interest calculated. Will I receive N100,000 upfront? Will my account be debited N900,000 and N1,000,000 paid to me in 91 days?
Answer: The interest rate offered (10% in your example) is per annum. You earn 10% when you invest for 364 days. If you invest for only 91 days, you only get a quarter of the rate (91/364 = ¼ 0r 0.25). That means you will only get a quarter of N100,000, which is N25,000.
The same goes for a tenor of 182 days. You are investing for half a year; hence, you get half the annual return. If you want to get the full return, then invest for 364 days.
The simple interest formula is used to calculate interest in treasury bills:
I = PTR (or P x T x R)
Where:
I is the interest accrued
P is the principal sum invested
T is time in years
R is interest rate as a fraction (divided by 100)
Nigerian Treasury Bills comes in 91, 182 and 364days tenors. Let’s use your example; you are investing N1,000,000 for 91 days at 10% per annum.
This is how your interest is calculated:
P = 1,000,000
T = 0.25 (91/364)
R = 0.1 (10/100)
Hence:
I = 1,000,000 x 0.25 x 0.1
= 25,000
So your interest income at the end of 91 days is N25,000.
Please note that this example is simplified. Brokers charge commissions and VAT. So based on your example, you are to fund your investment account to the tune of N1,000,000. You will be debited N975,000 (N1,000,000 – N25,000) while N25,000 is remitted back to your designated account or retained in your investment account based on your instructions to the broker.
The question – How Treasury Bills upfront interest works answered in the next article.
