In Nigerian Treasury Bill auctions, the discount rate is the annualised percentage deducted from face value to determine your purchase price. The stop rate is the highest discount rate the CBN accepts at a particular auction. They're related but distinct concepts, and confusing them leads to miscalculating your actual investment return.
When you buy a T-bill, you pay less than face value and receive the full amount at maturity. The discount rate determines how much less you pay. For a 364-day T-bill with a 20% discount rate and N1,000,000 face value, you'd pay N800,000 and receive N1,000,000 at maturity. That N200,000 difference is your return.
The discount rate isn't the same as your true yield, though. Because you're earning N200,000 on an investment of N800,000 (not N1,000,000), your effective annual return is actually 25%, not 20%. This distinction matters enormously when comparing T-bills to bank deposit rates or other investments that quote yields on an invested-capital basis.
For shorter tenors, you also need to annualise correctly. A 91-day bill with a 5% discount for the period translates to a different annualised rate than simply multiplying by four. The market convention in Nigeria is to quote discount rates on an annualised basis already, but it's worth confirming how your bank or platform presents the numbers.
The stop rate is an auction outcome, not something you choose. It's the highest discount rate at which the CBN fills competitive bids during a particular auction. Think of it as the clearing price. Everyone who bid at or below the stop rate gets their allocation; those who demanded higher rates get nothing.
Non-competitive bidders, which includes most retail investors, automatically receive the stop rate. This is why the stop rate effectively becomes the market rate for that tenor until the next auction. When news outlets report that "91-day T-bill rate is 19%," they're usually referencing the stop rate from the most recent auction.
Watching stop rate trends across auctions gives you a sense of monetary policy direction. A consistently rising stop rate means the CBN is allowing rates to climb, which often signals a tightening stance even before formal MPC announcements. Falling stop rates suggest the opposite.
The formula to convert a discount rate to a true (or investment) yield is straightforward. True yield equals the discount rate divided by (1 minus the discount rate multiplied by days to maturity divided by 365). For a 364-day bill at a 20% discount rate, that gives you approximately 24.9%.
This conversion matters most for the 364-day tenor where the gap between discount rate and true yield is widest. For 91-day bills, the difference is smaller but still significant if you're comparing against alternatives. A 91-day bill at 18% discount rate gives a true yield of roughly 18.8%.
Nigerian banks and platforms don't always clarify which rate they're showing you. Some advertise the discount rate because it looks cleaner, while others show the true yield because it looks higher. Always ask which convention is being used, or do the conversion yourself to make fair comparisons across investment options.
VENOBLE INSIGHT
We've seen retail investors consistently underestimate their T-bill returns by confusing discount rates with true yields. On a N10 million 364-day T-bill at a 20% discount rate, the true yield of roughly 25% means you're earning an extra N100,000 beyond what the headline rate suggests. VCORE stores both rates for every auction, making historical comparisons accurate.
The stop rate is the highest discount rate the CBN accepts during a T-bill auction. It's determined by sorting all competitive bids from lowest to highest rate and filling them until the total offer amount is allocated. The rate on the last bid filled becomes the stop rate. Non-competitive bidders, including most retail participants, automatically receive this rate.
Divide the discount rate by (1 minus the discount rate times days to maturity divided by 365). For example, a 364-day T-bill at 20% discount rate: 0.20 divided by (1 minus 0.20 times 364/365) equals approximately 24.9%. This true yield reflects your actual return on the amount you invested, not the face value.
Because you invest less than the face value but earn a return calculated on that face value. If you pay N800,000 for a N1,000,000 bill, your N200,000 gain is 25% of what you actually invested, even though the discount from face value was only 20%. The smaller your outlay relative to face value, the wider this gap becomes.