They are one of the most popular investment vehicles for the average Ghanaian who doesn’t have a thorough knowledge about investing, but what really are treasury bills and how do they work?
The two terms treasury and bill roughly mean central bank and loan. Therefore, we can say treasury bills are domestic loans that the central bank issues on behalf of government, for a very short term (91 or 182 days).
In essence, buying treasury bills means through your bank, you’re lending your money to the government for them to use it for various works and pay you back a little interest on it after the bill matures in either 91 or 182 days.
Treasury bills are a very low risk investment instrument and the returns are almost guaranteed. Like the salaries of most government workers, it will surely come unless a very serious crisis arises from nowhere and the government or the state breaks down. Accordingly, the returns on this low risk investment instrument are also usually low.
This is how treasury bill rates are determined: The government raises the money through the central bank, from licensed financial institutions known as primary dealers. The primary dealers are financial institutions licensed by Bank of Ghana and the Securities and Exchange Commission (SEC) to buy government-issued securities.
The Treasury bills are issued by government with a certain face value, during an auction. The primary dealers make bids in the auction for the bills, and attempt to buy the bills at a lower price than the face value. The difference becomes the interest earned.
For instance if a primary dealer buys treasury bills having a face value of 100,000 Cedis at the lower price of 91,000 Cedis, the difference of 9,000 becomes the interest (9%) which the primary dealer as an institution will earn at the maturity of the treasury bills. The average of the bids from the primary dealers during the auction, is what the Bank of Ghana uses in determining the treasury bill rate which is then posted to its website. Of course other factors such as inflation tend to affect treasury bill rates. When inflation is low, you can expect lower treasury bill yields.
You can buy T-bills with a minimum of a few 100 Cedis from most banks and earn a small interest on it at its maturity. The 182-day T-bill usually has a higher interest rate than the 91-day option.
There are no taxes on T-bill earnings and it is very low risk, partly why they’re a preferred investment instrument for many. However, the earnings as mentioned already, are usually low. If you’re interested, find out more from your bank before investing in it.