Treasury Bills

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 and 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 is 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.

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:

Where: C = consideration, N = nominal value tendered, P = bid or purchase price

C= N$10 000 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 with 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.

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:

Where: Y = effective yield; F = face value; d = days

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.

Example: discount rate

At the N$97.10619 per N$100 bid price, the bidder may calculate the discount rate using the following formula:

Where: D = Discount rate

per cent.

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:

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.

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:

Where: S = nominal (simple) interest rate

per N$100