This article outlines various investment opportunities in the money market in Nigeria.
Generating a steady means of income doesn’t always have to be tied to employment, sometimes investments, no matter how little, can earn interest and become a major source of wealth generation.
Before we get into the types of investments within the money market, let’s go ahead and understand what the money market is.
Understanding the money market
The money market typically refers to a part of the financial market where financial instruments with high liquidity and short term maturities are traded.
This market is one of the largest pillars in the financial system because it involves trades between the banks and the Nigerian government. However, the majority of money market transactions are wholesale transactions between financial institutions and companies.
In wholesale transactions, commercial paper is typically the most popular means of trade because of higher interest rates (higher than Treasury bills) and a broader range of maturities are available.
Individuals can also take advantage of these opportunities by trading in the Nigerian Treasury Bills, Bankers Acceptances, Commercial Papers, Certificate of Deposits, Call deposits and Bonds. These investment opportunities are expanded below:
Investment opportunities in the Nigerian money market
Nigerian Treasury Bills (NTB’s)
The Nigerian Treasury Bills are debt instruments issued by the Nigerian Government. These money market instruments are guaranteed which in turn means it’s practically risk-free. When an individual purchases a treasury bill, they are lending the government money. Usual tenures are 91 days, 182 days and 364 days. Because this investment is guaranteed by the Nigerian government, it can be used as collateral to secure loans and other credit provisions.
Bankers Acceptances (BA’s)
Bankers Acceptance is a piece of negotiation that functions as a post-dated check initiated by a corporation to a bank. This is often used to pay for large transactions. Unlike a regular check, the BA relies on the creditworthiness of the bank rather than the corporation. The bank requires the corporation initiating this BA to have enough liquid assets to cover the BA amount.
This transaction is guaranteed by the issuing bank and therefore as long as the bank is in business, the transaction is secure. This investment requires the bank to pay the holder (or third party) a certain amount on a specified date. Since BA’s are sold at a discount, investors receive the full value at maturity. The return on this investment is slightly higher than treasury bills
Commercial Papers (CP’s)
A commercial paper is an unsecured promissory note issued by a company attesting to borrowing from an individual. Since this investment is not backed up by any collateral only creditworthy institutions will find buyers without having to offer a substantial discount. Most firms use these CP’s to finance short term obligations.
For example, if you want to invest N1,000,000 at 20%, you’re only obligated to pay N800,000 while you’ll receive a promissory note for N1,000,000 at maturity. Again, since these deals are unsecured, the best way to make a decision on this kind of money market investment is to be sure and clear of the company’s creditworthiness. Interest is not subject to withholding tax.
Certificate of Deposit
This is an investment where you act as the lender to the bank. A certain amount is specified by the bank where you as investor decides to accept and leave for a certain amount of time as determined by the bank. The time commitment for this investment is firm and if there is any reason why you’d need to withdraw your investment, the bank will penalize you and only pay the interest during the time period of your investment. Interest received is subject to withholding tax.
Call Deposit
A call deposit is an investment bank account that offers both the privileges of a savings and checkings account without the penalties of early withdrawals. The interest rate of a call deposit depends on the amount in the account as well as a system known as banded interest rates. The interest accrued on this investment is subject to withholding tax.
Bonds
A bond is similar to an I.O.U. When a bond is purchased, you are lending money to the government or corporation. Bonds are used by government and corporations alike to fund large scale projects and operations.
There are different types of bonds available for investments:
- Corporate bonds are issued by private and public corporations
- Municipal and Government bonds are issued by the state, local and, government entities
- Municipal bonds are excluded from federal, state and local taxes
- Foreign bonds are issued by foreign corporations
- Asset-backed bonds are insured by a pool of assets.
Bond prices are typically inversely correlated with interest rates. So if the interest rates are high, bond prices are low and vice versa.
Below are the types of interests accumulated with bonds
- Fixed-rate interest: These are paid at regular intervals
- Floating-rate interest: These rates are adjusted periodically according to an index tied with short term Treasury bills
- Zero-coupon rates: These have no periodic interest payments. Bonds with these rates are sold at a discount and redeemed at face value.
Most bonds have the following characteristic:
- Face value: This is the amount the bond will be worth at maturity
- Coupon rate: The interest rate percentage the issuer will pay on the face value of the bond
- Coupon dates: Dates on which the issuer will pay interest rates
- Maturity date: The date on which the bond will mature
- Issue price: The price at which the issuer sells the bond
Conclusion
Choosing a money market instrument to invest in can seem daunting. Sitting with a financial planner is really the best way to go about making informed investments. Click here to book an appointment to know what your options are and start investing today!