MoneyMarketTreasury Bills

Treasury Bills (T-Bills)

These are the most marketable money market security. Their popularity is mainly due to their simplicity.  They are securities issued by a country’s treasury and is backed by faith and credit of that country. T-bills are a way for the government to raise money from the public. They allow the government to borrow money from us. T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturities. Tenor of this paper can be up to 2 years In Zimbabwe. Some will remember when the Reserve Bank of Zimbabwe offering some open market instruments in the form of T-Bills which made a significant number of people rich. Most of these funds were used for agricultural and productive sector purposes as RBZ went on to lend out this money. These were popularly known as OMO Bills.

This kind of investment instrument is guaranteed by the Government of Zimbabwe and therefore are thus perceived as having no risk of default. Risk of default means failure to honour the payment when due. Most investment teachers say these have no default risk but the truth is that even governments sometimes fail to honour their obligations. Some years ago a Latin American country went into a financial crisis because the government failed to pay its obligations. It is therefore possible for a government to default although this risk is low.

T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. For example, if you bought a 90-day T-bill at $18,000 and held it until maturity, you would earn $2,000 on your investment. The par value of the T-Bill would be $20,000. Treasury bills are issued through a competitive bidding process at auctions. If you want to buy a T-bill, you submit a bid that is prepared either non-competitively or competitively. In non-competitive bidding, you’ll receive the full amount of the security you want at the return determined at the auction. With competitive bidding, you have to specify the return that you would like to receive. If the return you specify is too high, you might not receive any securities, or just a portion of what you bid for.

Treasury Bills are normally floated by public tender through the central bank. So the investor would se adverts in the Press on how and where to get them. For while now the RBZ has not floated any Treasury Bills.

The biggest reasons that T-Bills are popular is that they are one of the few money market instruments that are affordable to the individual investors. T-bills are considered to be the safest investments in the world because governments back them. In fact, they are considered risk-free. Furthermore, they are generally exempt from taxation. The final advantage is that they are considered as liquid assets.

The only downside to T-bills is that you won’t get a great return because Treasuries are exceptionally safe. Corporate bonds, certificates of deposit and money market funds will often give higher rates of interest.

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