By Babajide Komolafe

I want to invest in treasury bills but I don’t know much. How do I go about it?

The request above came from a soon-to-retire employee of one of the prominent soft drinks bottling companies in the country. He was sitting close to my neighbour and friend with who I served my National Youth Service Corp same year.

The man overheard us discussing investment types—mutual funds, treasury bills, and commercial papers. He took advantage of the conversation and chipped in with his request. I explained to him and also directed him on how to get started. However, having received similar requests from readers recently, it occurred to me that many more people out there may also want to learn about these financial instruments. In this piece, I will be discussing how to invest in mutual funds, treasury bills, and commercial papers. But first, let me explain some key terms.

A financial instrument is a product or service rendered by financial institutions (banks, asset management companies, finance companies etc. They come with various names and serve different purposes and for different duration and returns (interest). Long term means the duration is more than one year, while short term means it is less than one year. Financial instrumentsq include treasury bills, commercial papers, bonds, bank deposits, shares, insurance, mutual funds, real estate investment trust etc.
Fixed income instruments are financial instruments that come with fixed interest rates hence the income expected does not change throughout the duration of the investment. Treasury bills and commercial papers, bonds are examples of fixed income instruments.
A discounted instrument on the other hand is a financial instrument with upfront payment of the interest rate or expected income. So, it is like a discount on the investment. For example, if the interest rate is 10%, and the money to be invested is N100,000. Since 10% of N100,000 is N10,000, the amount that will be actually invested will be N90,000. This means the instrument comes with a 10% interest rate discount, which you receive upfront.
Treasury bills or TBs and Commercial Papers or CPs are discounted instruments.
TBs and CPs are used for the same purpose but by different entities. Both are used to borrow from the public. Treasury bills are issued by the government to borrow for less than one year, while Commercial Papers are issued by private commercial organisations to borrow for less than one year.