A Fixed Deposit is a type of short-term financial investments sold by banks to its customers. A customer invests in a fixed deposit when he deposits his money with a bank in exchange for interest for a predetermined period. Fixed deposits can often be for One Month, Three Months, 6 Months and 1 year. In return for fixing your money with the bank for a fixed period, the interest paid on fixed deposits is always higher than the interest that the bank pays on a regular deposit.
Fixed deposits have the following characteristics:
a. They are for a fixed period of time
b. They are mostly sold by banks
c. The interest rate is higher than other regular deposit rates
d. The interest paid to the depositor is subject to 10% withholding tax
e. The depositor can decide to call back his cash ahead of the maturity date of the fixed deposit but loses his interest.
f. Interest rates on fixed deposits vary from bank to bank, from customer to customer and from the amount to amount.
g. The bank makes money by lending out the money you placed in the fixed deposit at a higher rate to borrowers. The difference between the interest it pays you on the fixed deposit and the interest its lenders pay is the bank’s profit.
h. Fixed deposits are sold daily by the bank to its willing customers
i. The banks pay the customer both the principal and interest upon maturity. However, a customer can request for a roll-over.
j. Fixed deposits are secured as long as the bank remains solvent.
k. If the bank goes bust, you lose your money too.
l. Fixed deposit can be used as a collateral but not accepted by all banks.
Treasury Bills is also a short term financial investment but sold by the Central Bank of Nigeria. An investor in treasury bills lends money to the CBN for a stipulated period in exchange for interest. Treasury bills are usually for a period of 91days, 182 days and 364 days.
Treasury Bills have the following characteristics:
a. Treasury Bills are sold bi-weekly or as determined by the CBN.
b. The CBN puts a limit to the amount of treasury bills it wishes to sell.
c. The CBN uses the funds from Treasury Bills to control the money supply in the economy
d. Interest rates for treasury bills are determined by an auction and can vary from investor to investor, amount to amount and tenor to tenor.
e. Interest on treasury bills is paid upfront.
f. The CBN pays an investor in treasury bills upon maturity and does not roll-over.
g. Treasury Bills can only be bought or resold at the Over The Counter Market (OTC).
g. An investor who can’t wait till maturity to cash out on the treasury bill can sell his investment at the OTC market
h.Treasury Bills are tax-free.
i. Treasury Bills is not secured by any asset but are backed by the full faith and credit of the Nigerian Government.
j. Treasury bills can be used as a collateral and are accepted by all banks.