What does discounted rate mean in treasury bills?
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Got you 1 *What is discounted rate* It is the interest you earn when you buy a treasury bill below its face value Example CBN sells you 100000 TB for 95000 The 5000 difference is your profit 2 *How to calculate it* Formula Discounted Rate equals Face Value minus Purchase Price divided by Face ValueRead more
Got you
1 *What is discounted rate*
It is the interest you earn when you buy a treasury bill below its face value
Example CBN sells you 100000 TB for 95000 The 5000 difference is your profit
2 *How to calculate it*
Formula
Discounted Rate equals Face Value minus Purchase Price divided by Face Value times 360 divided by Days to Maturity times 100
Simple version
Take the profit divide by face value divide by number of days multiply by 36000
Example
Face value 100000 Purchase price 95000 Days 91
Profit is 5000
5000 divided by 100000 divided by 91 times 36000 equals about 1978 percent
Bottom line
See lessDiscounted rate shows how much return you get for buying TB below face value The longer the days and bigger the discount the higher your rate
Treasury Bills are usually sold at a discount, meaning you pay less than the face value and receive the full face value when the bill matures. The basic formula is: Discount = Face Value × Discount Rate × (Days to Maturity ÷ 365) And: Purchase Price = Face Value − Discount For example, let's say youRead more
Treasury Bills are usually sold at a discount, meaning you pay less than the face value and receive the full face value when the bill matures.
The basic formula is:
Discount = Face Value × Discount Rate × (Days to Maturity ÷ 365)
And:
Purchase Price = Face Value − Discount
For example, let’s say you buy a ₦1,000,000 Treasury Bill with a 15% discount rate and 91 days to maturity.
Discount:
₦1,000,000 × 15% × (91 ÷ 365)
= ₦37,397.26
So your purchase price would be:
₦1,000,000 − ₦37,397.26
= ₦962,602.74
At maturity, you receive the ₦1,000,000 face value.
So your gross return is approximately ₦37,397.
One thing to remember: the discount rate is not exactly the same as the investment’s effective annualized return, because the discount is calculated on the face value rather than the amount you actually paid.
That’s why when comparing Treasury Bills with other investments, it’s important to look at the effective yield, not just the quoted discount rate.
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See lessMama Ngozi: Ah, my dear, let me explain to you in our own Naija way how to calculate discounted rates in Treasury Bills. Imagine you go to the market to buy tomatoes from me. Normally, you know that a basket of tomatoes costs ₦5,000. But if I tell you today that you can buy a basket for ₦4,500 if yoRead more
Mama Ngozi: Ah, my dear, let me explain to you in our own Naija way how to calculate discounted rates in Treasury Bills. Imagine you go to the market to buy tomatoes from me. Normally, you know that a basket of tomatoes costs ₦5,000. But if I tell you today that you can buy a basket for ₦4,500 if you pay immediately, that’s like getting a discount, right?
So, in the world of Treasury Bills, the discounted rate is similar. When the government wants to borrow money for a short time, it issues Treasury Bills. These Bills are like an IOU from the government saying, “I will pay you back this amount after a few months.”
Now, the price you pay for a Treasury Bill might be less than what it’s worth when it matures. This difference between the face value (what it’s worth when due) and what you pay (the discounted price) is the discounted rate.
To calculate this discounted rate, you consider the face value, the price you pay, and the time left until it matures. With this info, you can figure out how much of a discount you’re getting and what your effective return will be.
This helps the government borrow money from people who want a safe and secure way to invest their cash, just like you buying tomatoes at a discount. It’s a win-win for both parties!
So you see, understanding discounted rates in Treasury Bills is like getting a good deal at the market. It’s a simple concept that helps both the government and investors like you!
See lessIn Treasury Bills (T-Bills), a discounted rate means that you buy the Treasury Bill for less than its face value, and the difference between what you pay and the face value is your return. Simple example Suppose a Nigerian Treasury Bill has: Face value: ₦1,000,000 Discount rate: 14% per annum Tenor:Read more
In Treasury Bills (T-Bills), a discounted rate means that you buy the Treasury Bill for less than its face value, and the difference between what you pay and the face value is your return.
See lessSimple example
Suppose a Nigerian Treasury Bill has:
Face value: ₦1,000,000
Discount rate: 14% per annum
Tenor: 91 days
You do not pay ₦1,000,000 upfront. You pay a discounted amount, and at maturity the government pays you the full ₦1,000,000.
So, conceptually:
Amount you invest → ₦965,000 (approximately)
Amount received at maturity → ₦1,000,000
Your gain → ₦35,000
The exact amount depends on the Treasury Bill’s quoted discount rate and the number of days to maturity.
Why is it called “discount”?
Because you are buying the security at a discount to its face value.
Think of it like this:
Buy for ₦965,000 → receive ₦1,000,000 at maturity → ₦35,000 is your return.
Important: Discount rate ≠ interest rate
This is where many new investors get confused.
A T-Bill quoted at 14% discount rate does not necessarily mean you earn exactly 14% on the money you actually invested.
For example, if you invest ₦965,000 and receive ₦1,000,000, your return on your actual investment is:
₦35,000 ÷ ₦965,000 × 100 ≈ 3.63%
That 3.63% is for that particular 91-day period. When annualized, the effective yield is different.
So when comparing T-Bills with savings accounts, money-market funds, OPay savings, etc., look at the yield/effective annual return, not just the quoted discount rate.