Question

Annuities and Loans

Treasury bills and Treasury notes are an investment security issued by the U.S. government. A Treasury bill matures within one year and investors typically roll over the matured Treasury bill and purchase another Treasury bill the same day. Treasury notes have maturities of up to 10 years.

You are considering investing $50,000 in a Treasury bill that you will renew every 6 months or invest in a Treasury note that you will hold until maturity. Your investment time frame is 9 years.

Current investment opportunity interest rates are 5% and are expected to increase to 7% in 6 months. Would you invest in the Treasury bill that you can rollover every 6 months and reinvest or leave your money in the Treasury note that will mature in 9 years? Discuss your reasoning.

Answer 1

I will invest in the treasury bill that matures with in a six months and reinvest the money in another Treasury bill after six Month which will have higher rate than this one because after six months interest rate is going to increase so if you invest in the treasury note will face the Interest rate risk, i.e. the market interest rate will be higher than the interest rate on the treasury note so we will losse 2% if we invsest in treasury note. All thelong term securities are having the Interest rate risk because interest rate on our security is fix but interest rate in market is volatile.