Question

Identify the difference in the risks, returns, advantages, and disadvantages associated with the following investment alternatives:

For an investor who has a one-year time horizon, purchasing a treasury security that matures in one year versus purchasing a treasury security that matures in 30 years.

Answer 1

The return of one year investor will be lower than investor who invests for 30 years.

The risk associated will be lower for one year investor rather than investor who invests for 30 years.

Advantages of one year horizon is that if interest increases then he can reinvest it after one year.

Further the disadvantage will be if interest rate falls then he will have to invest it at lower amount.

For 30 years investors advantage is that even if interest rate will fall he will not be affected by it.

Disadvantages- if the interest rate will rise then he will not be able to reinvest it at higher rate.