How to Make Money From Treasury Bills

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Treasury bills or ‘T-Bills’ rates are quite attractive in Kenya, making them quite popular among investors seeking a safety net. They are accessible to anyone – individuals and corporations. They are quite easy to invest in and are low-risk as they are backed by the government. Treasury bills are securities issued by the Government of Kenya. Which means that when you purchase a treasury bill, you are lending the government money to run its budget.

Understanding Treasury Bills

To understand Treasury Bills, we will take a look at a 91 day previously issued Treasury Bill that was on offer on the Central Bank of Kenya (CBK) website. The details were as follows:

91-DAY

Issue Number: 2390/91

Auction Date: 15th October 2020

Average Interest Rate of Accepted Bids: 6.468%

Price per KSH 100 at the average interest rate: 98.413

Value Dated: 12th October 2020

Due Date: 11th January 2021

A Treasury bill has a face value of a certain amount, which is its actual worth. It is sold for less – in this case, the price of this 91-day bill quoted above is 98.413. This is the price you as an investor will buy it for. Every Treasury Bill has a specified maturity date, in this case, its the due date – the date upon which you’ll receive your money back. On this date, the government will pay you the full price of the bill – KSH 100 – and you earn 1.587, for every KSH 100 you invest. This amount that you earn is what we consider as interest rate or your payment for the loan of your money to the government.

The difference between the value of the bill and the amount of money you pay for it is called the discount rate, and it is set as a percentage. In the offer above, the discount rate is 1.587%, because KSH 1.587 is 1.587% of KSH 100.

How Treasury Bills Make Money For You

All treasury bills are short-term investment instruments and tend to mature within a year from the date of issue. The Government of Kenya issues 91-day, 182-day and 364-day Treasury bills. Therefore, as an investor, you have the option to chose your maturity periods. The longer the period, the more money you will earn from your investment.

In Kenya, the minimum amount you can buy a bill for is KSH 100,000. T-bills are sold in increments of KSH 50,000. Their purpose is to help the Kenyan Government finance the national debt. It is therefore a way for the government to make money from the public.

Here is a rough estimate of the money to be made from the offer above will be:

For an investment whose face value is KSH 100,000, invested at a rate of 6.468% for 91 days, will yield an interest of 1,348.95 at the end of the period. The investor’s initial investment will be KSH. 98,651.05. At the end of the period, the investor will receive 100,000. This amount includes an interest income of 1348.95.

Therefore, the total amount earned on this investment is KSH 1,348.95 at the end of the 91 day period. This gives an annual yield of 5.4%.

Things to consider

There are several things you need to consider before investing in treasury bills.

They include:

1. The Pros & Cons of T-Bills

The reason why treasury bills are so popular among investors is not only because they low-risk, but also because they are non-technical and very reliable forms of investment. Here are some pros and cons of investing in T-Bills.

Pros

a. High credit quality. Treasury bills are government-backed securities and therefore have a high credit quality.

b. Fast Returns. Treasury bill returns are realized within a year of investing.

c. High Liquidity. Treasury bills are a quite safe and highly liquid investment.

Cons

a. Low Returns. Treasury bills provide smaller returns than other forms of investment. This is because they are low-risk.

2. Balancing Risk & Opportunity Cost

T-Bills are not the best form of investment for all situations or individuals. The opportunity cost of investing in treasury bills is demonstrated in the unrealized gains that might be had elsewhere in the market. Therefore, when investing in treasury bills, one needs to balance the risk and opportunity cost to be realized.

For individuals aiming for a conservative approach to their investments in order to protect or preserve their nest egg against inflation and other factors, then treasury bills make a great place to park your money. On the other hand, for individuals seeking to accumulate wealth and save for retirement, they need to take on more risk and therefore, should take advantage of the opportunity cost of investing in stocks, bonds and other securities.

How to Buy Treasury Bills

You can easily purchase treasury bills at Central Bank of Kenya or at your local bank through a broker/dealer. The bills are issued through an auction bidding process, which occurs on a weekly basis.

Before you purchase a treasury bill, you’ll have to decide whether to make a competitive or non-competitive bid offer.

Non-competitive bidding is the simplest way to purchase treasury bills and is what most investors who are not experts in security trading do. When you make a non-competitive bid, you agree to accept whatever interest rate is decided upon at the auction. This way, you can guarantee that your bid is accepted and that you will get the full amount of your bull paid back to you. Therefore, the exact interest rate you will receive is announced when the auction closes – in the above offer it was the average interest rate of the accepted bids.

On the other hand, in the competitive bidding process, you can specify the return you want to receive. This kind of bidding is done by corporations or individuals who really understand the dynamics of supply and demand of the securities market.  Therefore, it is more complicated as you don’t know if your bid is accepted or not – as if the rate you offer is lower or equal to the rate set at action your bid will be accepted, and you’ll receive the uniform rate i.e. the highest accepted yield. All accepted bidders receive this rate even though they bid for less.

The auction process begins when the Central Bank of Kenya announces the treasury bill auction. At this point, the CBK will start accepting bids, which can be submitted at the CBK until the auction closing time.

Learn more: How to Invest in Treasury Bills in Kenya

The Bottomline

In the end, many investors find treasury bills’ safety net quite attractive and worth it. However, if you are looking for higher yield returns, consider looking elsewhere.

Happy Investing!


Image credits: Top by Pixabay via Pexels.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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