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.

According to the scenario, would it be wise to invest in a three-month Treasury Bill. Explain

Answer 1

T-bills at this time would be a good investment because of the pandemic around the world, however the T-bills would not be providing coupon payment, they are issued at a discount and at the maturity the face value is paid back. With the uncertainty in the economic environment that is spread around the world, Treasury bills would be safe option and in these time, it is better o focus on the preservation of capital then on focusing on generating extra returns. An option which would be slightly better than treasury bills would be T-bonds of small duration say 3 year or 5 year, they would provide a certain rate of coupon as well as safety of principal but in the absence of that treasury bills are certainly a good option. The corporate bond should be avoided at this time because the economic uncertainty brings high probability of default in corporate bonds.