How to Calculate the Returns on 3 Months Treasury Bill

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To calculate the returns on a 3-month (91-day) Treasury Bill (T-Bill) in Nigeria, you’ll need to follow a simple process that involves the purchase price, face value, and the discount rate. Treasury Bills in Nigeria are issued at a discount, meaning you buy the T-Bill at a lower price than its face value, and at maturity, you receive the full face value. The difference between the purchase price and the face value is your return.

Steps to Calculate the Return on a 3-Month T-Bill

Here’s how to calculate your return on a 3-month Treasury Bill in Nigeria:

1. Obtain the Discount Rate

The discount rate is typically determined at the auction conducted by the Central Bank of Nigeria (CBN). It represents the difference between the face value and the purchase price of the T-Bill, expressed as a percentage.

Let’s assume the discount rate for the 3-month T-Bill is 15% for a specific auction.

2. Calculate the Purchase Price

The purchase price is the price at which you buy the T-Bill. It is calculated by applying the discount rate to the face value of the T-Bill.

Formula: Purchase Price = Face Value × (1 – Discount Rate)

For example, if the face value of the T-Bill is ₦1,000,000, and the discount rate is 15%, you can calculate the purchase price as follows:

Purchase Price = ₦1,000,000 × (1 – 0.15) = ₦1,000,000 × 0.85 = ₦850,000

So, the purchase price is ₦850,000.

3. Calculate the Return (Interest)

Your return or interest is the difference between the face value and the purchase price. This is the amount you earn for investing in the T-Bill.

Formula: Interest = Face Value – Purchase Price

Using the example above:

Interest = ₦1,000,000 – ₦850,000 = ₦150,000

So, your return or interest earned on this T-Bill investment would be ₦150,000.

4. Annualize the Return (Optional)

If you want to know how the return compares on an annual basis, you can annualize it, even though the investment is only for 3 months. This is helpful for comparing with other annual investments.

Formula: Annualized Return = (Interest / Purchase Price) × (365 / 91)

Using the previous example:

Annualized Return = (₦150,000 / ₦850,000) × (365 / 91)

Let’s calculate it:

Annualized Return = 0.1765 × 4.01 = 0.707

This means the annualized return would be approximately 70.7%.

However, keep in mind that the 3-month return is much lower than the annualized return, which is based on the assumption that you could earn the same return over the full year.

Example in Action

Let’s summarize the process with a clear example. Suppose you’re investing ₦500,000 in a 3-month T-Bill with a 10% discount rate:

  1. Face Value: ₦500,000

  2. Discount Rate: 10%

  3. Purchase Price = ₦500,000 × (1 – 0.10) = ₦450,000

  4. Interest (Return) = ₦500,000 – ₦450,000 = ₦50,000

Thus, on a ₦500,000 investment, you would earn ₦50,000 as your return after 3 months.

Use of TreasuryBillsCalculator.com.ng

To make this process easier, you can use tools like the TreasuryBillsCalculator.com.ng. This tool helps you quickly calculate the returns based on the investment amount, the discount rate, and the maturity period. By inputting the relevant details, you can get an instant estimate of your returns without needing to manually perform the calculations.

Conclusion

Calculating the return on a 3-month Treasury Bill involves understanding the discount rate and the difference between the face value and the purchase price. In summary:

  1. Obtain the discount rate from the auction.

  2. Calculate the purchase price using the discount rate.

  3. Determine the return (interest) by subtracting the purchase price from the face value.

  4. Optionally, annualize the return to compare with other investments.

Using online tools like TreasuryBillsCalculator.com.ng can simplify the process and help you make informed investment decisions.

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