Question

You work as the treasurer of a large manufacturing corporation where earnings are down substantially as a result of COVID-19. In an environment where interest rates are going to decline over the next three to six months, you want to invest in fixed-income securities to make as much money as possible for the firm. The board recommends investing in one of the following securities:

• Three-month Treasury Bill

• Twenty-year Corporate Bonds

• Twenty-year zero-coupon Treasury Bonds

  Describe a suitable strategy based on your knowledge of bond theory, which may allow the company to maximize its profit if it were to undertake one of these investments. Further, advise the board on what is best for the company at this time given your knowledge of other investment options in the market.

Answer 1

The company should invest in Twenty Year zero coupon bond as it would give definite returns on maturity. The three month treasury bill is not recommended as the market conditions are volatile in respect of interest rates and other fluctuations. Also twenty year corporate bond has a risk associated with it. Depending on the worst condition of the company that issued the bond, the company might not be in a position to pay for its bond.

Hence, Twenty year zero coupon bond would be suggested.