Understanding how Treasury bill pricing works helps you evaluate whether the returns are worth it for your situation. The mechanics are straightforward once you see how the numbers fit together.
Use our Treasury Bills calculator to run the numbers at any face value and yield rate.
How discount pricing works
Unlike government bonds (which pay coupons), Treasury bills earn you money through the discount. You pay less than the face value upfront. At maturity, you receive the full face value. The difference is your return.
Think of it this way: if a T-bill has a face value of K100 and costs you K94.40, you are earning K5.60 for holding it until maturity. That K5.60 is your gross return before deductions.
The BoZ pricing formula explained
P = (1 / (1 + (n/365 x i))) x FP = the price you pay (your cost)
n = number of days to maturity (91, 182, 273, or 364)
i = the yield rate (expressed as a decimal, e.g. 0.119 for 11.9%)
F = face value (what you receive at maturity)
Using the BoZ example: 182-day T-bill at 10.5% yield, face value K100:
Calculate the day fraction: 182 / 365 = 0.49863
Multiply by the yield: 0.49863 x 0.105 = 0.05236
Add 1: 1 + 0.05236 = 1.05236
Take the inverse: 1 / 1.05236 = 0.95025
Multiply by face value: 0.95025 x K100 = K95.03
Your cost is K95.03. Your gross profit is K100 - K95.03 = K4.97.
Current rates and what they mean
The following table shows what you would earn on a K100,000 face value T-bill at current indicative yields.
Tenor | Yield | Cost | Gross Profit | WHT (20%) | Fee (1%) | Net Profit |
|---|---|---|---|---|---|---|
91 days | 10.85% | K97,367.44 | K2,632.56 | K526.51 | K26.33 | K2,079.72 |
182 days | 11.9% | K94,399.40 | K5,600.60 | K1,120.12 | K56.01 | K4,424.47 |
273 days | 12.3% | K91,576.57 | K8,423.43 | K1,684.69 | K84.23 | K6,654.51 |
364 days | 13.0% | K88,525.70 | K11,474.30 | K2,294.86 | K114.74 | K9,064.70 |
How the auction determines the rate
BoZ announces the amount on offer and the auction date.
Competitive bidders submit their desired yield rates along with the face value they want.
BoZ ranks competitive bids from lowest yield to highest.
Allocation starts from the lowest yield and works up until the total amount on offer is exhausted.
The rate at which full allocation occurs becomes the rate for all investors, including non-competitive bidders.
This is a uniform-price auction mechanism. All successful bidders pay the same price regardless of what they individually bid.
Tax impact on your returns
The 20% withholding tax and 1% handling fee are both calculated on the discount amount (your gross profit), not on the face value. This means your effective net yield is always lower than the stated yield.
The net discount is always 79% of the gross discount:
Net profit = Gross discount x (1 - 0.20 - 0.01) = Gross discount x 0.79Annualised vs actual returns
A 91-day T-bill at 10.85% does not mean you earn 10.85% in 91 days. The rate is annualised - it represents what you would earn if the rate applied for a full 365 days. Your actual return for the 91-day period is proportionally less.
For example, on a K100,000 face value 91-day T-bill at 10.85%:
Gross discount: K2,632.56
This is your return for 91 days, not for a full year.
Annualised gross return on your cost: K2,632.56 / K97,367.44 x (365/91) = 10.85%
Actual return for 91 days: K2,632.56 / K97,367.44 = 2.70%
The annualised rate is useful for comparing T-bills of different tenors and comparing with other annual-rate investments. But your actual cash return for the period is always the gross discount minus deductions.
Compare these returns to bonds in our Government Bonds vs Treasury Bills comparison, or learn about longer-term options in How to Invest in Government Bonds in Zambia.