Question

You have $5,000 to invest for the next year and are considering three alternatives: A money market fund with an average maturity of 30 days offering a current yield of 6% per year. A 1-year savings deposit at a bank offering an interest rate of 7.5%. A 20-year U.S. Treasury bond offering a yield to maturity of 9% per year. What role does your forecast of future interest rates play in your decisions?

500 words

Answer 1

We have different aspects to analyse while considering each of the alternatives:

1) Money market fund - It depends on the monthly interest rates when its time to roll over securities.

2) 1 year savings deposit - It we anticipate significant rises in rates we might want to rollover this.

3) US Treasury bond - If we think rates will be stable or either decline then we can consider this.

Based on the above information we can say that option 3 i.e. US treasury bond is the best option right now.