I have received several emails and calls from my readers asking whether to buy treasury bills or fixed deposits. Whilst, both are very good ways to invest your money there both have similarities and differences, which could work to your advantage depending on your investment preference. Let’s explore some.

Who borrows from you?

When you buy treasury bills you are basically lending money to the government (through the CBN) with a promise to pay back over 91 days, 182 days or 364 days. With Fixed deposit however, you are lending money to a bank or investment house with a promise to repay you at the expiration of the tenor (usually between one to twelve months) If you do not like to lend money to the Government then Fixed deposit is better.

What is the risk?

Treasury Bills are backed by the full faith and credit of the government and as such they are seen as almost risk free because it is very unlikely that a government can go bankrupt and not able to pay its loans. Besides the government has a tax revenue stream it can use to repay its borrowings. I am not aware that the CBN has ever defaulted.

Fixed deposits are backed by the credit rating of the bank. Unlike when you borrow from the bank, the bank does not give you any collateral when it borrows from you. However, it is obligated to pay you your interest and principal when it falls due. The bank can however default when it goes bust as we have seen in years past. When a bank fails, depositors may lose all or part of their money, including fixed depositors.

If you are weary of risk then treasury bills is best for you.

Who gives a better interest rate?

The higher the risk the higher the reward is how financial markets play and as such one will expect Treasury bill rates to be lower than fixed deposits rates. However, other factors do come into play that makes it change. Currently, Treasury Bills rate post a better rate than average fixed deposit rates in Nigeria despite the latter being the riskier of the two.

How do I get paid interests?

Some bank pay you interest at the end of the period along with the principal. Some also pay interest upfront depending on what you negotiate. Interests on Treasury Bills are paid upfront only and pays your principal at the end of the tenor.

Which one pays the most taxes?

Treasury bills are exempted from taxes, so taxes are not deducted from your interest payments. However, you are likely to pay a fee to the bank for rendering the service on your behalf. The fees are very small and almost negligible in my opinion. Interests on Fixed deposits attract withholding tax rate of 10% deductible at source by the banks and to be remitted to the relevant tax authority.

If you don’t want to be taxed then Treasury Bills is it.

Can I roll over my investments (interest and principal)?

Fixed deposits can be rolled over by banks. You simply instruct your bank to roll over the interest and principal when it matures giving you the benefit of compounding interest. It’s also a default way of saving and investing all rolled up in one. Treasury bills can’t be rolled over by default. Once the investment matures the CBN pays the money straight into your bank account.

If you are therefore looking for an investment you can roll over with ease, I suggest you go for Fixed deposits then.

Can I get my cash anytime I want?

You can get your cash anytime you want with Fixed Deposits by liquidating your account ahead of its maturity. All you need to do is to tell your bankers or investment house that you wish to cash in on your deposits. They will however, pay you interest for the period that the money was with them instead of the full tenor if you had waited till maturity. You may also incur an early withdrawal charge.

Treasury Bills on the other hand are not as flexible as fixed deposits. If you wish to cash in on your treasury bills ahead of its scheduled tenor, you will have to sell the rights to the treasury bills to the bank or to a willing buyer. The buyer will deduct the portion of the interest remaining for the period between when you terminated the investment and when it matures from your principal.

So basically, you can collect you cash in both instances except that it is perhaps faster and easier with banks

Can I use it as a collateral

Treasury Bills by their nature can be used as a collateral to collect a loan from a bank. This is because it is seen as a near risk free asset by lenders and is also quasi cash.

Fixed deposits can also be used as a collateral however the credit rating of the bank that is holding the deposits may affect the strength of it in the eye of another lender. Some banks may not accept fixed deposit in another bank as a full collateral because they don’t consider the bank a strong bank.

If you are looking to use your money as cash collateral, then Treasury Bills are more suitable

Caracta:
I beg to differ. Treasury bills can be rolled over with ease.

jaybee3:


You still need to instruct them to do so and it's possible for subsequent bids to be unsuccessful

Caracta:


You need to instruct in the case of fixed deposits too. I've not seen a declined treasury bills roll-over request. Interest rates may differ, I agree.

jaybee3:


Fixed deposits are rolled over by default

Who am i to argue with you sef aunty caracta

Caracta:


Lol. Fixed deposits should be rolled over ONLY at the instruction of the customer. That's the normal thing to do. I can sue any investment house (or bank) that rolls over my investment without my instruction.

But then, who am I to argue with my uncle jaybee? Your experience pass my own. I'm a learner.

jaybee3:

I guess banks have different rules when dealing with both instruments.

What i described has been my experience in the past few months

Ben1975:
Interesting

What is the current average interest rate for treasure bills at present? Can I obtain any in bouble digits?

Ben

Acidosis:
Wow, thanks sir!

Could you please give us 'mathematical' instances?

Assuming one buys treasury bills @#500,000, what should one expect over a period of 182 days? 365days?

What happens when high inflation sets in and the economy is growing faster than planned for..? CBN sells treasury securities, right? Is there any impact on those who earlier purchased bills prior to high inflation?


I understand interest rate varies in the money deposit banks and a limit exists as to what a customer can fix over a period (#500,000 right?)

jaybee3:

Rates are adjusted in line with inflationary pressures at time of auction hence why it's advisable to go for shorter tenures when inflation outlook borders around uncertainty

Acidosis:

Thanks for the explanations

Can one walk into any bank to purchase treasury bills? If No, which options are available and who exactly should one meet?


Thanks sir.

jaybee3:

You can walk into your bank to place your order (no guarantee that it will be successful though if you insist on specifying your own preferred rates)

Seun:
So fixed deposits are riskier, and for that extra risk you get the privilege of earning lower interest rates. That makes them a dumb choice.

Acidosis:

Thanks for the explanations

Can one walk into any bank to purchase treasury bills? If No, which options are available and who exactly should one meet?


Thanks sir.

Caracta:


Any bank you have an account with. Visit the customer service desk. Not all banks allow you to bid. You just have to take the bank rate so it's difficult to speculate.

ogawisdom:
TB interests r jst too low with rates generally below 12percent pa and one can get fixed deposits interest of up to 10percent pa n interest paid monthly n everything more flexible. Fixed deposits can be terminated quicker if there is an emergency n u get ur cash, it may take longer with TB.

Fixed deposit is d better choice if u want quicker access to ur fund if there is an emergency

Caracta:


Thank you. You can even get 11% in fixed deposits depending on your bargaining power. It's more flexible. The only disadvantage I see is the tax on your interest.

jaybee3:


Bargaining power as in the size of deposit abi?

Besides, it devoid common sense to tie large deposits into FD if CBN can only guarantee specific amount of money should the bank go bust

Caracta:


I can tie large deposits in 30 days and get my 10% rather than treasury bills for 91 days and end up with 9%. By the way, how many banks go bust in 30 days? By projection, some banks having going concern. They have the liver to remain for a long time e.g First Bank

jaybee3:

Are we still on treating these financial instruments as long term investment plans?

Caracta:


For loooooong term, you can go the treasury bills way. But then, it's better the roll over option is used and not just plunge into long term. That way, you can enjoy interest rates increment (if any). Long term is 364 days, right? Just a year.

jaybee3:


You don't necessarily need to do 364 days.. You could do 91 days to take better advantage of the parallel correlation of compound interest and favourable interest rates.

Besides, you need to understand how the banks themselves are able to pay you interest on FD. They largely rely on TBills, bonds and commercial papers themselves as well as the elephant in the room (profits accrued from loans et al).

In effect, if your investment plan is based on a longer term outlook then surely you are better off engaging in less risky asset class

Caracta:


The banks have a rate guide (annually in some cases). So irrespective of the variations in bonds, tbills and the rest, the rates may not change. That's why even when treasury rates drop due to economic forces, the effect on fixed deposits could be zero or near zero.

I agree with your last line. For long term, do treasury bills. If you don't have faith in your bank, do treasury bills. If you are very rich, do treasury bills or bonds.

If you are confused, split your funds into equal halves. One for treasury bills, one for fixed deposits, same tenor (say 91 days). I always recommend this.