Treasury Bills 101

Following the article I did a couple of weeks back on Treasury Bonds, many of you have written to me also asking inquiring about Treasury Bills. What is the difference? Do they work the same way? How does the valuation of Treasury Bills work? etc. If you recall, Treasury bonds are securities the government uses to borrow funds from the public. The loan that we give the government is referred to as a Bond. The interest rate on a bond is referred to as a coupon and is paid every six months. If you missed this article you can view it on our website or get in touch with us and we can send it to you.

Treasury Bills are similar in their function. It is still a vehicle that the government is using to borrow money from the public to ideally finance short-term expenditure such as salaries. In a business this is similar to what is referred to as working capital finance. The difference between Treasury Bills and Treasury Bonds is how they are structured. Firstly Treasury Bonds are issued for only short periods of time given that the funds are used to finance short-term expenditure. They are issued for three months, six months and one year. The official terms used are actually 91 days, 182 days and 364 days. This means depending on the intended use of your funds you can loan the government money for that period of time. In contrast Treasury Bonds have been issued for 1 year to 30 years. You then may wonder what is the difference between investing in a one year Treasury Bill and a one-year Treasury Bond (apart from any difference in interest). Say you had Kes 100,000 that you could place in either Bills or Bonds for one year and they were both yielding 10% p.a. In a Treasury Bond at the end of the year you would get your Kes 100,000 back plus your interest of Kes 10,000 (less any applicable taxes). Well with a Treasury Bill your interest will be paid to you differently. The concept used is called discounting. Before we get too wrapped up in the technical term, lets use Mary as an example.

Mary goes into a shop to buy a sweater. The price of the sweater she wants to buy is Kes 2,000. However they don’t have it in stock now and she will only receive it in two weeks. Mary uses that fact to negotiate. She is happy to pay for it now as long as she gets a discount. Mary therefore pays Kes 1,800 for the sweater and receives a Kes 200 shilling discount. This is in consideration for the fact that she is ready to pay the sweater now. In two weeks she will receive a sweater worth Kes 2,000. This is similar to how Treasury Bills work. Back to the Kes 100,000 we have. The value of the Treasury Bill you are investing in is Kes 100,000. However that is not what you would pay upfront. You would pay approximately Kes 90,000 shillings and at the end of the year you would receive Kes 100,000. So what has happened here? If you want to receive Kes 100,000 at the end of the year, the interest that is due to you is deducted from the investment you need to make upfront. You are investing in a Treasury Bill worth Kes 100,000 and paying approximately Kes 90,000 today. The Kes 10,000 discount you have received is in consideration for the fact that you are going to leave your money with the government for a year. Just like Mary got a Kes 200 discount for leaving her money with the store for two weeks. You are being compensated for the opportunity cost of your money. If you had not invested in Treasury Bills you probably could have found an alternative use of your money. The Kes 100,000 would be referred to as the face value of the Bond. Depending on the term you choose, the discount you receive would be different. The longer you invest, the higher the discount. If you had invested in a six month Treasury Bill as opposed to one year, you would have received approximately Kes 5,000 as the discount.

Treasury Bills are safe investments so your objective would not be to get exceedingly high returns. You would consider Treasury Bills as an alternative to parking your money for the short term. If you have money sitting in an account, do not need the funds for at least three months (but you need to keep it safe) it is worth comparing the return you would get if you went the Treasury Bill way. Currently the 91-day Treasury Bill is returning about 10% p.a. You are probably not earning that with your savings account. The minimum investment required for Treasury Bills is Kes 100,000. The process of investing in Treasury Bills is similar to Bonds. You need open a CDS account with the Central Bank. Treasury Bills are usually issued every week and information can be found on the Central Bank Website on what they have on offer.

Waceke Nduati

Waceke runs a program on personal financial management. Find her at waceke@centonomy.com| twitter @centonomy| www.facebook/centonomy

Question and Answer

Your article last week on budgeting really hit home for me. I have tried working with a budget many times and keep failing. I am one of those people you mentioned in your article that is now scared to try again. However I thought about it and realised it is big expenses that really throw me off particularly school fees. How can I handle these big expenses and still make my budget work?

Excellent question. For many of us irregular expenses really does really throw us off when trying to create and work with a budget. The secret is to treat those irregular expenses such as school fees as if they were monthly expenses. For arguments sake let’s say school fees costs you Kes 120,000 every year. If you earn a monthly income it is easier to accommodate this expenditure as well on a monthly basis. So you would divide the annual figure by 12 hence Kes 10,000 per month. Put this Kes 10,000 aside every month irrespective of whether school fees is due that month or not. That way when it comes to paying fees it does not throw you off. Many of my clients who have started using this principle actually find that in a short while they able to have funds ready even before school fees is due. Put this money aside from your usual bank account into a separate savings account. Note that this is not a saving or investment. You are just putting money aside for a future expense. You still need to do other savings or investment.

Waceke Nduati

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