Quite often, there are talks about using treasury securities, say Treasury bills, as the “baseline” for what your money can return with no risk. Yet, to the beginning investor, these items are a bit unclear: what are they? How are the returns? How can an individual investor get them?
Treasury bills are short term, usually less than one year, typically three months, maturity promissory note issued by the government as a primary instrument for regulating money supply and raising funds via open market operations.
In Ghana, Treasury bills are issued by the Bank of Ghana on behalf of the government. T-bills, as they are commonly called, do not pay any interest directly; instead, they are sold at a discount of their face value and thus “earn” by selling at face value upon maturity. The rate of return is thus the annualized return that a given T-bill will have when comparing the amount paid for a T-bill, what it will be worth upon maturity, and how long it takes to mature.
This yield is closely watched by financial markets and affects the yield on corporate bonds and bank interest rates. Although their yield is lower than other securities with similar maturities, T-bills are very popular with institutional investors because, being backed by the government’s full faith and credit, they come closest to a risk free investment.
This is how it works: Treasury bills have a face value of a certain amount, which is what they are actually worth, but they are purchased for a price that is less than their face value; when they mature, the government pays the holder the full face value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. For example, a bill may be worth GHC1000, but you would buy it for GHC960. Every bill has a specified maturity date, which is when you receive money back. The government then pays you the full price of the bill – in this case GHC1000 – and you earn GHC40 from your investment. The amount that you earn is considered interest, or your payment for the loan of your money. The difference between the value of the bill and the amount you pay for it is called the discount rate, and is set as a percentage. In the example above, the discount rate is 4 percent, because GHC40 is 4 percent of GHC1000. What you note is that the interest rate payable depends on how long you lent your money for.
After the money has matured, you can decide on the following;
- take all your original money together with the interest.
- continue with the investment (roll over the principal) and take your interest.
- roll over both the principal and interest.
The biggest reason why T-Bills are so popular is that they are one of the few money market instruments that are affordable to the individual investors (You can start with as low as GHC10). Other positives are that T-bills are considered to be the safest investments because government backs them. Treasury bills are risk free. They can easily be converted into cash. Interest earned is higher than bank savings account rates. There are no transactions cost and for most banks, they can be used as collateral.
The only downside to T-bills is that you will not get a great return: Corporate bonds, certificates of deposit and money market funds will often give higher rates of interest. What is more, you might not get back all of your investment if you cash out before the maturity date.
Anyone above 18 years can buy treasury bills at any bank that offers Treasury bill services. Also, you can buy treasury bills for a person less than 18 years (a minor) and hold it in trust for him or her. Additionally, it can be held in trust for family members, friends or organisations.
With all this on the plate, you know you have no reason not to invest!
