## Investing in Government Treasury Bills

Many individuals and institutions enquire about investing in Government Treasury Bills.  At the end of December 2004 approximately G\$47 billion worth of Treasury Bills was outstanding. New issues of Treasury Bills are offered on a regular basis.  In addition to refinancing maturing debt and raising new funds to meet current obligations, these offerings are made as part of the authorities’ strategy to sterilise excess liquidity in the financial system.  These bills are of 91-day, 182-day and 364-day maturities.  Instead of carrying interest-bearing coupons these bills are sold at a discount below the “par” or “face” value that the holder receives at maturity.  For example one may bid at a price of G\$90 per G\$100 of 91-day Treasury Bills.  The discount rate which is defined  as the difference between the lower price paid for a security and the security’s face value at issue, can be calculated from the following formula:

((face value-purchase price)/face value) x (365/term) x 100 =  discount rate

where “term” is the term-to-maturity (which may be 91, 182 or 364 days depending on the particular issue) but can also refer to the number of days to maturity in the case of a rediscount operation.  Using the example above the discount rate will be computed as follows:

((100-97)/100) x (365/91) x 100 = 12.03 %

((face value-purchase price)/purchase price) x (365/term) x 100 = yield

The annualized yield, which is defined as the actual rate of return per year, is calculated as follows:

((100-97)/97) x (365/91) x 100 = 12.41%

The amount of treasury bills offered are published in the national newspapers.  Among the information published for each tender are those relating to the issue date, the maturity date, the closing date for tender, the settlement date, and the average discount rate for the previous issue.  After submission, bids are accepted on a competitive basis.  The higher the offer price, the lower will be the discount rate and thus the more competitive will be the investor’s bid and the greater the chances that the bid will be accepted.  As an illustration, let us assume that the Government offers G\$1.0 billion of 91-day Treasury Bill to the public and there are three investors; investor A, investor B and investor C each bidding for G\$0.5 billion.  Let us further assume that investor A, investor B and investor C have submitted offer prices of G\$97.01, G\$95.51 and G\$93.21 per G\$100 respectively.  From the authorities’ standpoint, based on the formula for the discount rate presented above, investor A would have submitted the most competitive bid, followed by investor B.  Since bids are allocated to the most competitive bidders until the amount offered is exhausted, only these two investors would be successful and would be allocated the amounts bid for.