Question

You have a student loan of $15,000 with annual interest of 7.0%/year and have received an unexpected bonus from work of $5,000. Should you put the cash towards paying off your loan or to buy Treasury notes? Why?

Answer 1

If you have a student loan of $15000 with annual interest of 7% per year and have received an unexpected bonus from work of $5000 then in that case you should put the cash towards paying off you loan instead of buy treasury note. Because probably the internet rate payable on loan must be higher than the internet rate that you will be earning on treasury note. Therefore, it would be better to pay the loan from bonus instead of buy treasury notes.

Accordingly, if you utilise the bonus for payment of loan, your principal payable on loan will get reduce which will also reduce the amount annually payable as interest.