Questions:
- Q1:Can I buy Treasury Bills directly from the Government or Central Bank of Sri Lanka?
- Q2:Do I receive a certificate (scrip) when I purchase a Treasury Bill?
- Q3:Why is the interest calculation in a Treasury Bill different to a Time/Fixed Deposit calculation?
- Q4:I wanted a 3 month Treasury Bill. How is it that the Treasury Bill I got is less than 91 days?
- Q5:Why is it that the Central Bank’s published interest rates are higher than the rates received from the Bank?
- Q6:Can I take my money out before the Treasury Bill matures?
- Q7:How will a capital gain or a loss arise?
- Q8:How do I calculate the capital gain or loss?
- Q9:If I am selling my Treasury Bill before its maturity, do I still get the original yield for the number of days I kept the Bill?
- Q10:Do I pay Tax on my interest income or capital gains?
- Q11:Can I buy Treasury Bills in joint names?
Answers:
A1: Can I buy Treasury Bills directly from the Government or Central Bank of Sri Lanka?
No. Only banks and finance institutions who act as Primary Dealers can directly buy Treasury Bills from the Public Debt Department of the Central Bank of Sri Lanka on behalf of the customers. The general public has to buy their Treasury Bills from one of the primary dealers or commercial banks.
A2: Do I receive a certificate (scrip) when I purchase a Treasury Bill?
No. Government securities such as Treasury Bills and Treasury Bonds are issued in data entry form without a paper certificate, referred to as ‘scripless securities'. The transactions will be settled through an electronic settlement arrangement known as Lanka Secure.
Lanka Secure Account is the facility available for the investor to hold his/her personal scripless securities in the central depositary system at the Central Bank of Sri Lanka. This is similar to your stock holdings of the Colombo Stock Exchange through the Central Depository System.
Lanka Secure will mail an account statement of customer transactions and holdings each month directly to the account holder.
A3: Why is the interest calculation in a Treasury Bill different to a Time/Fixed Deposit calculation?
A Treasury Bill is a traded instrument. For ease of trading the future value, i.e. the value at maturity is stated on the face of the bill. Investors should simply discount the future value at the market yield [or discount rate] using the Present Value (PV) formula stated under the Treasury Bill Calculation Example to arrive at the investment value.
A Fixed Deposit is a bilateral transaction which is not traded in the market. Therefore it is convenient for both the deposit taker and the depositor to agree on the investment value and compute the future value based on the stated interest rate.
A4: I wanted a 3 month Treasury Bill. How is it that the Treasury Bill I got is less than 91 days?
Treasury Bills are issued by the Central Bank of Sri Lanka each week for Friday maturity. If the investment was made on exactly the date of issue, the period of investment will be 91 days. If invested subsequently, then the number of days to maturity will be less than 91 days.
A5: Why is it that the Central Bank’s published interest rates are higher than the rates received from the Bank?
The published rate by the Central Bank is the wholesale price and does not include any transaction costs. The Bank’s rate reflects the costs incurred.
A6: Can I take my money out before the Treasury Bill matures?
Yes. You can sell the Treasury Bill in the secondary market [to a primary dealer or commercial bank] and exit the investment prior to its maturity. However, depending on the market interest rates and the numbers of days to maturity there is a possibility that you may incur a capital gain/loss, if the Bill is sold before maturity.
A7: How will a capital gain or a loss arise?
Price and Yield have an inverse relationship. As a result, the price increases when yield decreases and vice versa. Therefore capital gain/loss can only be made if current market yield is varied from the purchase yield.
Example: Assume a 91 day Treasury Bill with a yield of 16.00% is purchased and sold in 45 days at 13.00%. thus incurring an approximate 3% capital gain.
A8: How do I calculate the capital gain or loss?
Holding Period Return:
Holding Period Return is the return computed between the purchase price and the sale price for the period that the security was held. For example, based on the above graphical illustration the price has moved up by Rs. 2.2299 in 45 days.
Therefore the percentage Holding Period Return is (which includes a Capital Gain) = (2.2299/96.1538) X (364/45) X 100 = 18.75%
Capital Gain:
The Capital Gain is depicted by an upward shift in the curve. For example with 46 days remaining to maturity, with a 3.00% dip in yields (16.00% to 13.00%) the capital gain is 0.3656 (98.3837-98.0181) for every Rs. 100.00 face value.
Therefore the Capital Gain as a percentage of purchase price is = (0.3656/98.0181) X (364/46) X 100 = 2.95%
A9: If I am selling my Treasury Bill before its maturity, do I still get the original yield for the number of days I kept the Bill?
No. If you sell the Treasury Bill prior to maturity your return will then be Holding Period Return (calculated under “How do I calculate the capital gain or loss?”). That could be higher or lower than the original rate depending on how the market rates have moved since the investment was made. For instance, after making the investment if the market rate has moved below the original rate, then your ‘Holding Period Return’ will be higher and vice versa if the market rate has moved higher than the original rate.
A10: Do I pay Tax on my interest income or capital gains?
No. Individual investors do not pay any further tax on earnings apart from the 10.00% withholding tax imposed at the primary issue itself.
