Treasury bills are short-term government securities issued by the Government of the Republic of Namibia in bearer form. The holder is entitled to sell it and to payment at redemption. These Bills are issued on a discount basis, currently with initial maturities of 91 days, 182 days and 365 days. This means that income from investing in TB's at the primary issue, is the difference between the offer (or purchase) price and the nominal (also called face or maturity) value.
· Tax free return for the individual (Section (16)(1)(1) of the Namibian Income Tax Act of 1981)
· Fixed rate for the duration of the investment.
· Relatively liquid. Bank Windhoek is always a willing price maker on the Government of Namibia Treasury Bills.
· Depending on your tax status treasury bills can be an attractive investment. For example if your taxable income is less than N$ 10 000 per annum you will not be liable to pay tax and thus it would not make a difference tax wise for you to invest in treasury bills. You should therefore go for the highest available interest rate.
· Your expectation of the trend in interest rates is very important. If you expect interest rates to decline in the near future, it may be wise to fix your investment for 12 months or even longer and thus guarantee your income.
· Treasury bills are only available in multiples of N$ 10 000.
· Interest is not paid monthly but only on the maturity of the investment.
How safe is a Treasury bill investment
Treasury bills are considered a low risk investment with the biggest risk being the theft of the original certificate. That is why most clients’ request that the institution they buy the treasury bills from keeps it in safe custody. It is therefore very important to buy your treasury bills from an institution you can trust with your original documentation, otherwise you may one day find that your money was never placed on treasury bills.
Secondly you must be at ease with the internal controls and remedies in the case of fraud at the institution you buy your treasury bills from, otherwise you may suffer big losses if the relevant institution are not adequately capitalized or insured.
The return on treasury bills can be expressed in two ways namely the yield and discount rate. Most institutions quote yields in order to make the investment decision easier for clients when comparing the returns on treasury bills to other money market investments.
For example let us say we engage in the following selling transaction:
Republic of Namibia Treasury bill
24 October 2007
23 January 2008
N$ 100 000
The consideration or purchase amount payable by the client is calculated as follows:
Nominal Value / (1+ (Interest Factor/365 x tenor))
N$ 100 000 / (1+ (0.08/365 x 91)) = N$ 98,020.52
This means that on an investment of N$ 98,020.52 for 91 days the client will receive a return of N$1,979.48
The yield is calculated as follows:
N$1,979.48/N$98,044.48 x 365/91 x 100 = 8.10%
The discount is calculated as follows:
N$1,979.48/N$ 100 000 x 365/91 x 100 = 7.94%
Please note that the same formulas apply when treasury bills are purchased for periods shorter than the normal tenor of 91 days. The 91 days in the above formula are then substituted with the relevant shorter tenor.
Treasury Bills are issued in a Book Entry System (BES) in which records of ownership are electronically registered. Information is detailed in the Book Entry System section. Holders are entitled to sell their TBs in the secondary market upon completion of a relevant transfer form issued by the Bank or to receive capital and interest payment at redemption. These Bills are issued on a discount basis, currently with initial maturities of 91, 182, 365 days. This means that income from investing in TBs, at the primary issue, is the difference between the offer (or purchase) price and the nominal (also called face or maturity) value.
The offer price of the bid must be quoted in terms of a percentage of the nominal value (N$100) expressed at most to the nearest N$0.00001 per hundred, that is, rounded to 5 decimal places. As a general rule, the relatively closer the offer price id to N$100, the higher the probability of getting an allotment, but then the lesser the return on the investment (and the cheaper it is for the Government to borrow). Examples of basic calculations in TBs are given below and a list of formulae is provided in Appendix I.
A. Example: Consideration
If a bidder offers N$95.76000 for every N$100 for a nominal amount of N$10 000, on a 91-day bill, this means that this bidder is willing to pay an amount (called the consideration) of N$9 576 for the Bill at the time of tender. This amount is calculated by using the following formula:
C = NxP/100
Where: C = Consideration, N = Nominal value tendered, P = bid or purchase price
C = N$10 000 X N$95.76000/100 = N$9 576
Upon maturity this bidder will receive a nominal amount of N$10 000 for such a bill and thus would earn N$424.00 (N$10 000 – N$9 576) in 91 days. By deciding on the bid price, bidders have an opportunity to determine the amount of interest income from investing in TBs, provided that their price is competitive. As a starting point in the process of tendering for TBs, bidders may decide on the return from investing in these instruments using an effective yield (compound interest) or discount rate or nominal (simple) rate. The effective yield assumes that interest earned on an investment is based on the principal and on interest subsequently earned on such principal. Furthermore, it assumes that the principal and interest is reinvested at regular intervals at the initial rate. In addition, this rate also enables bidders to compare their preferred returns on alternative investments that are quoted on a similar basis. Knowing the desired yield, a bidder can then calculate the price that s/he must quote on the tender form.
B. Example: Effective Yield
If a bidder decided on an effective yield of 12.5 per cent on the 91-day TB investment, he/she can calculate the price using the following formula:
P = F
(Y/100 + 1) d/365
Where: Y = effective yield; F = face value; d = days
P = 100 / (12.5/100 + 1) 91/365 = N$97.10619 per N$100
To compare and ascertain whether this bid price is competitive vis-à-vis prevailing market rates on TBs, which are normally quoted on a discount basis, a bidder may use this price to calculate a discount rate. The discount rate expresses the future income stream (N$100) in present value or price (N$97.10619). In addition, the discount rate is often quoted in the market and would be useful for comparing the bidder’s rate with that prevailing in the market.
C. Discount Rate
At the N$97.10619 per N$100 bid price, the bidder may calculate the discount rate using the following formula:
D = (F – P) X 365/91
Where: D = Discount rate
D = 100 – (D X D/365)
Alternatively, a potential investor can start the process of tendering by looking at the prevailing TBs discount rate and general interest rate outlook in the market to decide whether they would like to tender or not and if so at what price to tender. If a bidder decided to quote 11.60704 per cent discount rate for a 91 days TB, that bidder may calculate the price using this formula:
P = 100 – (D X d/365)
P = 100 – (11.60704 X 91/365) = N$97.10619 per N$100
A potential investor can, however, also start the process of tendering by deciding on a nominal (or simple) interest rate. A nominal rate represents a rate of return on a capital amount invested over a given period. The following example shows how a prospective investor can calculate the price from a nominal rate.
D. Example: Nominal Rate
If an investor tenders for a nominal or simple rate of 11.95294 per cent for 91 day TB, what price must that investor quote on the tender form? Using the following formula, an investor will calculate the price as follows:
P = 100 / (1+d/365 x s/100)
Where: S = nominal (simple ) interest rate
P = 100 / (1 + 91/365 x 11.95294/100) = N$97.10619 per N$100